31st Aug 2005 06:01
Serco Group plcInterim results for the six months ended 30 June 2005BUSINESS REVIEWThe Business Review sets out Serco's contract wins and operational performanceduring the first half of 2005, along with developments in our markets.Separately today, we have announced our interim results and released furtherdetails of our transition to International Financial Reporting Standards.Copies of these documents are available on our website, www.serco.com.OVERVIEWSerco's vision is to be the leading service company in its chosen markets. Thegroup's strategy is to build a balanced, international contract portfoliothrough organic growth, achieved by delivering great service and building longterm relationships.That focus on long term relationships, where we can help clients achieve theirambitions through continuous improvement, organisational change and assuredservice delivery, is reflected in our strong first half performance indelivering growth across markets, notable business wins and high levels ofservice.In the period to end-June, we signed new contracts valued at more than ‚£700mand were appointed preferred bidder on contracts valued at a further ‚£1.5bn.The first few weeks of the second half have seen further strong performance.So far this year, we have signed, or been appointed preferred bidder, forsignificant contracts valued at more than ‚£1.15bn with the UK Ministry ofDefence (`MoD') - Serco's longest standing client.Our health services business became preferred bidder for a ‚£1.2bn privatefinance initiative (`PFI') contract to improve services at three hospitals inLeicester, UK, and our transport division was appointed preferred bidder tooperate and maintain a rapid rail transit link in Canada, valued at up toC$600m to Serco.In addition, Serco won or extended more than 100 small and medium sizedcontracts during the first half, including business process management and ITservices valued at over ‚£100m.The first half of 2005 also saw the acquisitions of ITNET plc (`ITNET') and RCIHolding Corporation (`RCI') completed and the integration processes begun. Bothorganisations have been reorganised and renamed, and they are increasinglyworking with colleagues across the group in developing opportunities andimproving performance.Quality service delivery is the foundation of our growth and in the first halfwe saw a strong operational performance across the businesses, particularly inrail where our management of the UK's Northern Rail, Docklands Light Railwayand Merseyrail has improved train punctuality and availability. In Australia,The Ghan train service has further increased passenger numbers and is lookingto increase the frequency of this iconic train journey through the heart of thecountry.In the US employees of our federal air traffic control teams once againreceived a prestigious national award for their services.Government inspectors found that our education teams in Bradford, UK, had madesignificant progress in improving the opportunities for children through betterdelivery of the education service. Inspectors also recommended that furtherpublic sector investment would be needed in Bradford to sustain these levels ofimprovement.Our environmental service teams serving the people of Woking, UK, have achievedtheir highest ever satisfaction ratings.All around the world, people are experiencing a quality of service that makes adifference to their lives. Expectations are met and often surpassed becauseSerco's public service ethos encourages our people in bringing service to life- which in turn develops our long term relationships and increases the scopeand scale of the work we do.CIVIL GOVERNMENTThe civil government sector remains our largest market. Revenue grew by 31% inthe first half, representing 37% of our first half revenue.Home AffairsUKSerco's remit in home affairs covers four segments: homeland security, lawenforcement, offender management and immigration control. Our contract baseranges from managing prisons and operating electronic monitoring programmes todeveloping IT systems for the police and criminal intelligence agencies.We support the UK Home Office and its associated agencies in their search forintegrated, cost-effective and innovative solutions. These customers arespending significant sums. The Home Office and its associated agencies arebudgeted to spend over ‚£12bn in 2005/6. During this period, the Home Officewill spend more than ‚£600m on crime reduction and community safety. TheNational Offender Management Service (`NOMS') has a central budget of almost ‚£300m and is responsible for prison and probation budgets of over ‚£2.4bn and ‚£900m respectively, while immigration control and management costs the UK around‚£1.7bn annually.The combination of our Premier Custodial Group and Justice divisions into onebusiness - Serco Home Affairs - offers customers the unique combination of astrong service ethic underpinned by a depth of technology capability. Thecreation of this business gives us the scale and breadth of capability we needto compete for the major opportunities we see ahead of us. At the end of thefirst half, there were several significant contracts in the pipeline, notablyin the areas of border control and homeland security, where our technology andsecurity capabilities give us a significant advantage. We are confident ofpositive news on bids which would be valued at over ‚£180m to us.Electronic monitoring is established as an integral part of the UK justicesystem as an effective means of monitoring curfew compliance. In April, havingbeen successful at rebid, we began two key electronic monitoring contracts withthe Home Office, covering Greater London and East Anglia, and West Midlands andWales. The contracts are for five years each with the possibility of extensionsof up to a further two years and together are valued at approximately ‚£18m perannum.We are also currently participating in the use of voice verification andsatellite tracking initiatives and interest has been shown by other governmentdepartments such as the Immigration and Nationality Directorate (`IND') and thepolice.The government's decision to defer market testing of three publicly run prisonson the Isle of Sheppey was a less encouraging development. Instead, the publicsector has been invited to submit proposals on how it would manage the prisons.Separately, the government is expected to announce how it plans to progress itsprison contestability agenda. A forum to be chaired by the Home Secretary willbe held in October and we remain confident of further opportunities in thisarea.Our reputation in immigration control has been reinforced by the opening of the334-bed Colnbrook Immigration Removal Centre and Short-term Holding Centre inAugust 2004. The Home Office has publicly commended Serco's `high level ofcommitment and motivation'. We anticipate further opportunities in this area.Serco's relationship with the National Crime Squad (`NCS') continues to thrive,with several enabling projects nearing completion as preparations for thelaunch of the Serious Organised Crime Agency, in April 2006, continue onschedule. This new body will be formed through the merger of NCS and theNational Criminal Intelligence Service, along with elements of HM Revenue &Customs (`HMRC') and the IND. We are confident that our track record with thesedepartments will open up new opportunities in this area.Elsewhere, Serco continues to foster strong links with law enforcement agenciesacross the UK, engaging new audiences in the debate over the value of privatesector provision of essential support services.Mainland EuropeLast year, Serco won Germany's first major prison contract at Hƒ¼nfeld inHessen. Preparations for this contract are progressing on schedule. Serco willprovide all non-custodial services within the prison, including psychological,medical and educational care of the prisoners. Serco will also provideindustrial work for approximately 220 prisoners. German law requires the stateto retain control of custodial services.North AmericaDevelopments in local and civic government are creating an increasingly robustpipeline of opportunities. We see emerging opportunities for homeland securityprojects across virtually all of our chosen state and local markets includinganalytical, technical and training services. For example, we are bidding forcontracts to help local authorities develop, coordinate and conduct emergencypreparedness training. Such work includes the development and conduct ofbioterrorism tabletop and full scale exercises for hospitals. Participants willinclude hospital staff, Regional Counter Terrorism Task Forces, emergencymedical services, emergency management agencies and local first responders.Additionally, Serco is looking to provide further systems engineering supportfor the Customs and Border patrol in California.EducationEducation is one of the largest and fastest growing areas of governmentspending in the UK. In 2005/6, the cost to the public sector is expected to be‚£70bn, an increase of 8% on the previous year. We estimate our currentaddressable market at around ‚£4bn. Market growth drivers include the pressureto increase children's educational achievement, the need for improvedefficiency following the Gershon review, and investment in infrastructure - inparticular under the Building Schools for the Future (`BSF') programme. Thereare also emerging opportunities in children's services.Serco has established a sound track record in the UK education sector, and theimprovements our management teams have achieved in the schools of Walsall andBradford have been significant. Earlier this year, the Office for Standards inEducation (`Ofsted') declared the performance of Bradford's schools`satisfactory'. Once among the UK's poorest performing local educationauthorities, it is now among the most improved in the country. Meanwhile, thechildren of Walsall continue to benefit from the passionate commitment of ourschool management professionals.We remain actively involved with the UK Government's BSF programme. Over thenext 15 years, this programme will deliver around ‚£40bn of capital investmentto rebuild or refurbish 3,500 schools. We are working in partnership with IBMto provide a complete information and communication technology (`ICT') solutionto several consortia preparing BSF bids. We are also providing educationaladvice and guidance to a number of other bid leaders.Our schools software continues to penetrate the education sector, attractingpraise from a growing number of schools. Facility - our innovative informationmanagement solution - is also providing vital support to teachers at otherschools across the country, reducing their administrative workload and enablingthem to focus on their work with pupils.Meanwhile, we continue to raise our profile in the children's services market,where the number of opportunities is rising. This follows government moves toalign education and other child support services more closely, focusing themaround schools. This is likely to provide a range of opportunities includingthe integration of ICT databases and systems, working with the newly formedChildren's Services Directorates to help them integrate their services andcultures, as well as helping to improve poorly performing elements within thesemore widely based organisations.HealthTotal health spending by the UK Government is expected to be nearly ‚£90bn in2005/6, some 9% higher than the previous year. Of this, we estimate that around‚£10bn is accessible to Serco. Market drivers include the need to reduce waitinglists, investment in new facilities - including through PFI - and payment byresults.In March, our joint venture with Equion Ltd, a division of John Laing plc, wasnamed preferred bidder on the Leicester Pathway PFI project. This programmeinvolves the extensive modernisation and refurbishment of three hospitals forthe University Hospitals of Leicester NHS Trust. Financial close is expected in2006.Serco will support the new facilities and manage the transition process. Whenthe five-year development phase is finished, we will provide support servicesto the trust for a further three decades. In total, the operating contract isvalued at around ‚£1.2bn to Serco over the 35 years. This contract builds on thefacilities management contract that Serco has managed at Leicester RoyalInfirmary (`LRI') since August 1996. For the past four years, the Serco teamhas enabled the LRI to achieve green star rating, the highest rating in thePatient Environment Action Team evaluation. This covers areas such as cleaning,catering and the environment.We will continue to bid selectively for hospital PFIs that allow us to secureattractive long term operating contracts, with near-term opportunities arisingat the Forth Valley Primary Care NHS Trust and Nottingham City Hospital NHSTrust.Serco has consistenly delivered strong results at the Norfolk and NorwichUniversity Hospital, frequently achieving satisfaction levels over 92%. Thequality of our performance recently helped the hospital to improve its NHS starrating from one star to two stars in the national scheme. Our contract atWishaw General Hospital continues to deliver strong performance, increasing theuse and integration of technology to support and improve service delivery. Ourperformance at Wishaw positions us well for emerging health contracts inScotland.Our specialist health consultancy provides strategic advice to all levels ofthe NHS. In the first half it achieved sustained growth, after a strong 2004.Its clinical focus and expertise, client access and market knowledge ensure ourhealth strategy is appropriately targeted. Throughout the first half, wecontinued to explore new opportunities across the health sector, diversifyinginto new areas such as the management of chronic diseases.Regional and local government servicesWe finished the half with a number of important wins under our belt, as webuilt on our strong reputation among UK local authorities for IT services andbusiness process management. Among other agreements with local authorities, wesigned a two-year, ‚£11m contract extension with Southwark. Our existingcontracts with Ealing and Richmond grew organically by more than ‚£3m in total.Towards the end of the half, we announced our selection by IBM assub-contractor to manage key IT platforms and services for Bradford Council.This contract covers helpdesks, network management, desktop services,application management and server management. The award is part of a widerbusiness transformation programme led by IBM, with a total contract valued atalmost ‚£160m to the consortium.In April, our streetscene and environmental services partnership with BrecklandDistrict Council commenced. The partnership is valued at ‚£3m a year over 20years, and a number of high-profile cleanup initiatives are already deliveringreal improvements to the local environment.Demand for our services within the local government market remains strong, withcouncils pursuing a wide range of strategic partnership opportunities inenvironmental services, housing repairs and improvements, and streetscene. Ourcurrent pipeline for these services is over ‚£500m over the next 12 months,based on bids in progress.ConsultingSerco Consulting aims to raise awareness of and enhance Serco's reputation withpotential and existing customers by providing high value advisory services. Itis also an attractive and profitable business in its own right, which willgenerate revenue of around ‚£16m this year and employs around 80 consultants.Our consulting capabilities have been enhanced by specialist management andtechnology business French Thornton, which was formerly owned by ITNET andwhich provides services to the government and private sector. Its addition haswidened the scope of our opportunities whilst enhancing the quality of ourconsulting bids.During the first half of 2005, Consulting recorded a number of business winsincluding assignments at the BBC associated with TV licensing and property, anda programme management assignment in the commercial directorate of theDepartment of Health, as well as new projects at the Financial ServicesAuthority, HBOS plc and Arla Foods UK. Continuing long-term assignments includethe Office of the Deputy Prime Minister and HMRC.In North America, Serco employs numerous consultants who are engaged inworkforce planning and business process reengineering projects with several USFederal agencies.Other government servicesMiddle EastAs Gulf states such as the United Arab Emirates (`UAE'), Bahrain and Qatarcontinue to boom, our Dubai-based businesses are strongly positioned tocapitalise on the unprecedented proliferation of opportunities in the region,most notably in the construction sector.Serco is already emerging as the Gulf's leading facilities managementspecialist, providing strategic consultancy support on two iconic constructionprojects in Dubai: Palm Island and the Burj Dubai tower.In January, we signed an agreement with Mubadala Development Company to form ajoint venture to provide facilities management services for the proposed new19,000 student UAE University at Al Ain, which will be complete in 2010. Ourconsultancy team is already very much involved in the design of the newcomplex. The first buildings come on stream in 2006 and the contract is for aperiod of 14 years.Mubadala is an investment arm of the Abu Dhabi government and this contractindicates an increasing interest in partnering between the public and privatesectors within the region.Asia PacificIn February, our New Zealand joint venture Serco Project Engineering Ltddelivered the first four of seven fire-fighting trucks to the AustralianCapital Territory (`ACT') Government. These vehicles - built as part of acontract worth NZ$2.4m - carry state-of-the-art compressed air foam systems.They are designed to strengthen the ACT's defences against the bush fires thatare prevalent across Australia.TRANSPORTTransport revenue grew by 61% in the first half, representing 25% of ourfirst-half revenue.RailUKSerco has achieved strong growth in the UK rail market since we began operatingour first franchise - Merseyrail - in 2003. We see good opportunities in thisarea as franchises are remapped, reducing the number from 21 to 16. Theproposed break-up of the Central franchise may benefit us, and we anticipatebeing given the opportunity to tender for services that border our NorthernRail franchise. We will also consider bidding for other franchises as they comeup for renewal in the next few years. Our experience further positions us wellto take our proposition overseas, in particular to Germany, the market mostadvanced in tendering after the UK.Northern Rail - which started in December 2004 as a joint venture withNedRailways - is our largest contract to date. Over eight years nine months, itwill be worth around ‚£2bn to Serco. During the first half, we consistentlyexceeded service performance targets, delivering real improvements for thethousands of passengers who use the network daily. As the consolidation of theold North East and North West franchises into the new Northern organisationcontinues on schedule, we expect to achieve further performance and customerservice enhancements while delivering efficiencies.Our Merseyrail network runs a greater proportion of trains on time than anyother UK rail network. While the national punctuality level averages 86.2%,Merseyrail's management and staff achieved a score of 94.7% in the firstquarter of 2005. Passenger numbers have risen by 5.5% in the past year.Merseytravel was the first local transport authority to assume responsibilityfor a network from the Strategic Rail Authority. Merseytravel now wishes toextend its responsibility to include the infrastructure currently managed byNetwork Rail. This is currently planned for transfer to Merseytravel in 2006and we would then be responsible for all infrastructure maintenance andoperations on the Merseyrail network.Asia PacificFollowing the success of The Ghan train's weekly return service betweenAdelaide and Darwin, our Great Southern Railways business launched a secondweekly service for the three-month peak tourist season. This additionalcapacity has been fully sold. In July 2005, The Ghan carried 10,000 passengersin a single month on its legendary two-day transcontinental journey betweenAdelaide and Darwin. This is twice the volume carried in the same period in2003 on this service, which previously operated on the shorter route betweenAdelaide and Alice Springs. Plans for a further expansion of services in 2006are at an advanced stage.Urban TransportationIn the UK and other developed economies, policy is increasingly shiftingtowards integration of different modes of transport as governments battle withincreasing congestion and its social and economic costs. In the UK, forexample, there is a trend towards the development of integrated transport plansto support investment in major projects.In response to these trends, we have combined our light rail and roadoperations to position us as an urban transportation integrator. Ourcapabilities cover the broad range of transport operation and technologyservices required by major conurbations, including light rail, passengerinformation systems, bus lane design and traffic control centres. The breadthand depth of our experience allows us to integrate one or more of theseservices into a client's existing framework. We believe this puts us in a verystrong position to capitalise on growth in these markets.UKSerco is the UK's largest light railway operator, carrying 45% of the country'slight railway passengers when measured by passenger kilometres.In the first quarter of the year, the Serco-operated Docklands Light Railwaycontinued its highly successful record of service reliability by equaling itsbest ever performance of 97.3%. During the half, we submitted a rebid tomaintain and operate this record-breaking service for a further seven or nineyears, to be determined by the client. We are pleased to have been shortlistedto the final two bidders. The contract award decision is expected towards theend of this year.While we were disappointed at the cancellation of the Lorry Road User Chargeproject, for which we had been shortlisted, the UK government has stated itsintention to introduce general road pricing and has made funding available forlocal charging schemes. We believe that there is still significant potential inthe UK market.Serco is a leading supplier of traffic management systems and services and hasa strong track record in Stockholm, Sydney, London and Hong Kong.In England, we also operate the National Traffic Control Centre which ishelping travellers plan and complete their journeys by providing real timetraffic information, including alternative routing advice, direct to the mediaand the public via a website and interactive phone service as well as onroadside variable message signs. Achieving full implementation has taken longerthan envisaged and we are working with our client, the Highways Agency, tocomplete the implementation phase.Our expertise in the area of traffic management information has led to furtheropportunities overseas.North AmericaSerco has established an office to enter the North American integratedtransportation market. The primary focus will include technical andservice-based solutions for transportation agencies. Technological solutionswhich are well established within the UK will be positioned for US marketentry. With the recent passing of the US highway appropriation bill, thismarket will see an increasing focus on private sector involvement in newinitiatives. This is a large and exciting market, where we can leverage many ofour existing relationships. Initial studies have revealed a robust pipeline ofshort, medium and long term opportunities.We are currently bidding for the operation and management of Hampton RoadsSmart Traffic Center, Virginia. We have identified a number of trafficmanagement center opportunities throughout the major metropolitan areas ofNorth America. State and local transportation agencies are increasingly lookingto private sector solutions.In addition, Serco is actively developing the market in several large US citiesfor the deployment of the smart meter parking management system, which we havesuccessfully installed in San Francisco.In March, Serco was appointed preferred bidder for its first ever railoperation contract in North America. Its joint venture with SNC-Lavalin wascommissioned to provide a fully automated, driverless train system connectingVancouver, Richmond and Vancouver International airport. Construction isplanned to commence in August 2005 with completion scheduled in time for the2010 Winter Olympics. After the five-year construction period, the jointventure will operate and maintain the line under a 30-year agreement, worthbetween C$16m and C$20m per annum to Serco.Asia PacificIn June, we signed a contract with the Roads and Traffic Authority (`RTA') ofNew South Wales to deliver a system that will monitor bus punctuality andprovide traffic signal priority. The contract requires Serco to work closelywith RTA staff to develop and maintain the client's existing bus management andpriority system while delivering design improvements. The contract is valued atAUS$6.7m over three years, which includes a system trial on 270 buses.Depending on the trial's success, Serco will have an opportunity to participatein the expansion of the system, which is planned to cover a further 5,000buses.AirMiddle EastThe construction boom across the Middle East is driving growth in other areasof the region's economy, notably aviation, where we are building on ouroutstanding track record. In April, we signed yet another extension to our airtraffic control (`ATC') contract with Dubai Civil Aviation, which has been aSerco client for the last 45 years. The latest two-year agreement is wortharound ‚£12m in total.We also signed a one-year extension worth ‚£2m to our ATC contract at Bahrainairport, which is planning a major expansion in response to massive growth inaircraft and passenger numbers.North AmericaDuring the half, Serco was awarded the prestigious Willie F Card FederalAviation Administration Federal Contract Tower Service Award for the thirdsuccessive time since its inauguration three years ago. Given public concernsover air traffic control issues since 9/11, this achievement is significant andacknowledges Serco's excellent safety and service record there.DEFENCEOur defence business grew by 29% in the first half of 2005 and accounted for23% of Group revenue.UKThe MoD is recognised as leading the world in the use of the private sector tosupport its vision. With new threats materialising, new methodologies requiringnew support arrangements and little increase in UK defence spending, the MoD isfocusing resources and seeking cost savings. This presents Serco withopportunities for growth. We expect our addressable market in the UK to doubleto ‚£8bn by 2010.Our success in winning new business with the MoD reflects our skill as anintegrator capable of delivering bespoke solutions based on innovation andflexibility. This integration capability is demonstrated by the award of one ofour most significant defence contracts, the ‚£400m Defence Academy CampusIntegrator (`DACI') at Shrivenham, Wiltshire. For the next 23 years, we willdeliver support services to this world-class academic centre of excellence forsenior MoD commanders and staff.The DACI contract builds upon the long-term relationship and spirit ofpartnership we have established with the MoD. The agreement followed oursuccess at designing, building and managing the MoD's Joint Services Commandand Staff College (`JSCSC'), an achievement that has been praised by theNational Audit Office as `a textbook PFI'. In turn, the JSCSC contract wasinstrumental to Serco winning the Middle East's first PFI, to build a jointtechnical training college for Oman's Ministry of Defence, currently atpreferred bidder status.Similarly, our expertise in developing and managing science facilities hascontributed to Serco being appointed preferred bidder for a strategicpartnership with the Defence Science and Technology Laboratory (`Dstl'). Valuedat around ‚£400m to us over 15 years, this contract will see us manage thedesign and build of new facilities for Dstl, the migration of 1,600 scientiststo these facilities, and provide support services ranging from laboratoryset-up to travel management across the entire Dstl estate.Over the last six months, stronger links with the Royal Navy, one of our keycustomers, have helped us secure several significant contracts, including theWaterfront Training and Education Centres (`WTEC') contract.The strategically significant WTEC contract involves delivering a wide range ofe-learning, web-based learning and computer-based training at Her Majesty'sNaval Bases at Devonport, Faslane and Portsmouth. The centres are being set upas part of the Royal Navy's Rebalancing Life initiative which has driven thedevelopment of training provision at the waterfront to enable Navy personnel tobalance operational commitments and family life. Scheduled to start in August2005, the WTEC service follows a successful pilot at Devonport in 2004.Our respect for the Royal Navy's heritage, our understanding of the MoD'svalues and our dedication to bringing service to life proved instrumental tothe success of the celebrations that marked the 200th anniversary of the Battleof Trafalgar on June 29. Among other essential marine services, Serco personnelhandled 1,000 ship movements in 12 days on behalf of the Royal Navy. Withouttheir contribution, it would not have been possible to re-enact the battle orcomplete the naval review.Skynet 5, one of the largest-ever defence PFI contracts, is designed toguarantee Britain's armed forces with secure communications whenever andwherever required. Since February, this service now enables the MoD to receivemore imported information services on platforms such as ships with IP dataservices. Skynet 5 - worth ‚£220m to Serco in a contract extending to 2018 - isalso on target for the next milestone in early 2007. By then, the first Skynet5 spacecraft will have been launched to provide the MoD with a new generationof satellite communication.Middle EastSerco and its joint venture partner Bahwan Group were chosen in 2004 as thepreferred bidder for a 30-year, $1.4bn PFI contract to design, build andoperate a joint technical training college for Oman's Ministry of Defence.Contract negotiations are proceeding. The college will eventually accommodateup to 2,000 students, both military and civilian.North AmericaThe acquisition of RCI was completed in March and has been well received by ourclients, demonstrated by the continuing flow of task orders arising from thevarious multi-award contract vehicles in the portfolio. The most significantindicator was our successful rebid for the US Army's Career and Alumni Program,which helps retiring US Army soldiers, civilian family members and theirfamilies transition successfully from federal service. This win will extend ourunbroken support to this important program to more than 17 years - anexceptional achievement in US defense contracting. We have also been selectedas one of the successful contractors on a multi-award basis for the support ofthe Pentagon's information management centre. In total, we are in line to bidfor 200-300 employee years of work under this agreement.The US Department of Defense recently announced it was realigning and closing anumber of bases and reassigning troops around the world. These initiativescreate substantial near-term and long-term opportunities for Serco based on ourinvolvement in supporting soldier activities affected by reassignment to otherbases. Serco is also well positioned to benefit from changing base support andinfrastructure requirements driven by these changes.Our ability to win new business with the US military has been greatly enhancedby the success of our Price Fighter contract with the US Department of Defense.Under this agreement, we provide the engineering and analytical expertise thatthe department needs to measure whether it is paying an appropriate price tothird-party suppliers and contractors.Following the completion of the RCI acquisition, Serco has been nominated for aprestigious Federal Contractor of the Year award in the medium businesscategory.Over the coming months, we hope to explore innovative ways of leveraging theexpertise and experience we have gained in the US defense sector to furtherstrengthen our relationship with defence authorities elsewhere, notably in theUK.Asia PacificIn May, Serco Sodexho Defence - our joint venture with Sodexho - was namedpreferred bidder to provide the Australian Department of Defence with garrisonsupport services in the Sydney West South region of New South Wales. Partly anew bid and partly a re-tender, this contract, signed in August, issubstantially larger than the original contract, valued at around AUS$200m toSerco over a term of up to nine years.Also in May, Defence Maritime Services - our joint venture with P&O Maritime -delivered the first of 12 Armidale class patrol boats to the Australian Navy.After successful sea trials, HMAS Armidale was officially commissioned in Junein its new home port of Darwin. In the period, Defence Maritime Services alsosigned a contract with Australian Customs Services, valued at AUS$36m over sixyears, to maintain eight patrol boats.SCIENCESerco's science sector revenue grew by 13% in the first half, representing 15%of our first-half revenue.UKScience and technology remain at the top of the UK political agenda as driversof wealth creation and improvements in healthcare and the environment. Serco isnow an established part of the UK's technical community, creatingpublic-private partnerships to maximise the impact of science and turngovernment policy into results.Serco, together with our joint venture partners BNFL and Lockheed Martin, hassigned an amendment significantly increasing the scale of our contract with theMoD to operate the Atomic Weapons Establishment (`AWE'). The increasedgovernment investment is valued at ‚£350m to Serco over the next three years. Wewill deliver a programme of investment in key skills and facilities at AWE. Ourexperience at AWE and our capabilities elsewhere within our science business -such as the provision of safety advice to nuclear power generators and theRoyal Navy's nuclear submarine fleet - have positioned us as a key player inthe nuclear industry. We have secured a contract to develop safety casescenarios and environmental impact assessments for Urenco's nuclear enrichmentplant at Capenhurst, near Chester. This one-year contract - critical in termsof health and environmental protection - is worth ‚£400,000.Serco also continues to play an important role in national security. In May,Serco successfully bid for a ‚£5m contract under the MoD's nuclear propulsioncritical technology research programme, applying our unique knowledge ofmaterials performance and applied physics.Serco has also secured a ‚£13m contract to supply the MoD's Integrated SensorManagement System, an intelligent network of sensors designed to detectchemical, biological or nuclear attacks on field installations. Ultimately, weplan to transfer the leading-edge technology developed on this project toharness new opportunities in the civil sector.Drawing on our nuclear expertise and Serco's market leadership in applying theGovernment Owned Contractor Operated model, we are positioning ourselves to wina significant share of the UK's emerging ‚£2bn per annum nuclear clean upmarket, following the establishment of the Nuclear Decommissioning Authority inApril 2005. The first competition for management of a UK site is expected inearly 2006.Our Science division operates the UK's National Physical Laboratory (`NPL'),which continues to win funding for new programmes. Towards the end of the half,the Department of Trade and Industry (`DTI') awarded NPL contracts valued at ‚£4m to develop innovative services in micro-nanotechnology (technology measuredin millionths and billionths of a metre) working in partnership with, amongstothers, QinetiQ, Taylor Hobson, Imperial College and University College London.NPL also won a contract valued at ‚£1.2m to provide on-line support to DTI's newTechnology Networks.Applying this knowledge base to environmental challenges, NPL won a researchcontract with the Department for Food, Environment and Rural Affairs to assessnano-particulates in the atmosphere. It could improve life for millions ofpeople by helping to improve the way that the UK's air quality is monitored andmanaged.Increasingly, innovation support is being delivered on a regional basis.Regional Development Agencies and devolved administrations around the UK areinvesting in innovation and technology centres and Serco has established aportfolio of contracts and opportunities in this market. We have teamed up withthe University of Wales to manage the Centre for Advanced Software Technology,under an ‚£8m programme to develop a cluster of innovative software businessesin North Wales.We are closely engaged in projects that will transform the way society benefitsfrom global positioning technology. NPL has won a prestigious three-yearcontract to provide the time for Europe's ambitious Galileo constellation of 30global navigation satellites. Galileo is due to start operating from 2008 andwill provide a guaranteed global positioning service under civilian control,with accuracy to within a metre on the ground.NPL is part of a core consortium of nine European organisations developing theGalileo Time Service Provider. This will support a range of time-dependentapplications such as telephone networks, digital broadcasting and the Internet,as well as giving everyone access to a reliable source of time for everydayneeds.Mainland EuropeElsewhere, Serco successfully rebid a contract in Italy worth ¢â€š¬14m over threeyears to provide services to the European Space Agency's (`ESA') earthobservation programme. The service makes remote-sensing data available toscientific users once it is captured by satellite. This contract is part of alarger agreement worth ¢â€š¬41m over three years to a Serco-led consortium of 24companies. This involves completing a comprehensive cost reduction programmewhile harmonising the delivery of services across all of ESA's earthobservation activities.We also successfully rebid our contract for engineering support at ESA'stechnology centre, ESTEC, in the Netherlands. The roots of this support workcan be traced back over 30 years and include spacecraft design, laboratorymaintenance and operation, mission simulation and scientific research. Thecontract is worth over ¢â€š¬4m per annum and has an anticipated duration of fiveyears.PRIVATE SECTORSerco has traditionally approached the private sector on an opportunisticbasis, building up a portfolio of blue-chip clients, such as Microsoft,GlaxoSmithKline, Airbus and The Boots Company. The acquisition of ITNET hasincreased our presence in this sector and it is now a strategic focus for us.With commercial clients increasingly concentrating on their core activities andfacing strong international competition, they are moving from single serviceproviders to fully integrated service providers such as Serco. This allows usto grow organically by selectively bidding for new contracts and expanding therange of services we provide to each client.We are focusing on those areas within the private sector which will benefitfrom the provision of a wide scale, single supplier approach for supportservices and information services. This approach builds upon our traditionalfocus of manufacturing, transport, utilities, financial services andhospitality.UK and EuropeWe have continued to build our relationships with key customers in food anddrinks manufacturing. At Coca Cola Enterprises Ltd, our IT services have beenextended for a further three years. Cadbury Schweppes has implemented anenterprise resource planning solution within the UK which is hosted within ourdual data centres in Birmingham. Food services provider 3663 chose SercoSolutions to introduce a new service regime which will provide a common ITdelivery platform within each of the company's 43 sites and will help itincrease the efficiency of distribution.In Wales & West Utilities, Serco helped to implement a 20-week business processreorganisation and SAP implementation for the regional gas distributionnetwork. Despite very tight deadlines, the project went live successfully on 1June, and the relationship with Wales & West Utilities continued to strengthen.The overall project was managed by Macquarie Bank, with which Serco isdeveloping an ongoing relationship.Our focus on and knowledge of our customers is providing us with theopportunity to expand our services in the information technology sector intowider support services that embrace the full end-to-end capability of Serco.Our relationship with Microsoft has developed from providing traditionalfacilities management services to the provision of multi-activity integratedservices. We now operate Microsoft's Global Shared Services from its EuropeanOperations Centre in Dublin, processing some 300,000 invoices every year fromMicrosoft suppliers in 17 European countries. In addition, we providelicensing, processing, documentation control, revenue and rebate recognitionservices and in February, we were awarded a prestigious contract for theprovision of administration and personal assistant services to Microsoft seniormanagement and directors.We renewed our contract with Airbus UK for the provision of integrated servicesto its manufacturing facility in Filton, UK, valued at ‚£25m over a further fiveyear period. Serco already provides a fire and rescue service to Airbus, and inApril we were awarded the "Top Airport Fire Service Award" by the CivilAviation Authority.The Starwood Group Hotels & Resorts Worldwide Inc is one of the leading hoteland leisure companies in the world. Our relationship with them is developing.In 2004, we commenced with the provision of engineering and security servicesto their 5* Westin Hotel in Dublin. In February of this year, due to thesuccess in Dublin, we were awarded a contract for the provision of maintenanceand property-related services to the Westin Turnberry resort in Ayrshire andSheraton Grand Hotel and Spa in Edinburgh.In May we were awarded a contract to provide facilities management services tothe Bank of Ireland's property portfolio in Northern Ireland. This covers itsbranch network of 44 properties and five administration properties, includingits prestigious new Northern Ireland Head Office in Belfast.North AmericaSerco continues to grow its fleet and power distribution business with USutilities such as Dayton, Power & Light, Exelon Energy and various othersmaller utilities.At PECO Energy, a natural gas and electric utility in Pennsylvania, we havecompleted the first year of contract operations where we provide fleetmanagement services to support over 10 sites involving some 1500 vehicles. Atthe end of the first year, Serco exceeded contract performance requirementswhile delivering a 20% reduction in cost of services to PECO. This is the firstcontract arising from our appointment as preferred supplier of fleet managementservices to Exelon, PECO's parent group and one of the largest US electricitygenerators and energy distributors.We continue to win work to provide computer-aided facilities managementservices in the commercial sector to add to our existing portfolio of FannieMae, a lending institution; Capital One, a financial services company; and theUniversity of Maryland.- Ends -For further information please contact Serco Group plc: +44 (0) 1256 745 900Dominic Cheetham, Corporate Communications DirectorRichard Hollins, Head of Investor Relationswww.serco.comENDSERCO GROUP PLCRelated Shares:
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