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posted on Jan 31, 2014 by NelsonHall Analyst
Serco has updated its guidance for 2013 and 2014 following its clearance by the U.K. government to bid for new contracts. Serco expects a mid-single digit percentage organic decline on 2013 revenue due to:
- Lower levels of incremental work won across the group to date
- Attrition from contracts lost such as electronic monitoring
- Volume reductions in its Australian immigration detention services contract
- Assumptions as to the extent to which it will be successful in securing further rebids and extensions as well as new bid opportunities during the year
- Adverse currency movements in 2013. The impact of this has reduced revenues in 2013 by ~£50m and profits by £8m.
Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2013 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal programme.
Serco's ongoing portfolio management resulted in further non-core disposals in 2013. These businesses contributed £43m of revenue and £7m of profit up to the point of disposal last year and will not contribute to revenue and profits in 2014.
In 2014, Serco expects:
- Continuing additional costs of £10m a year related to the corporate renewal programme within its adjusted operating profit
- One-off costs incurred in 2014 of ~ £15m for external advisers and other directly-related costs of programme implementation, including initial training and systems set-up
- A further restructuring charge estimated at £10-£15m will be incurred in 2014 to implement reductions in headcount and related costs.
Market consensus for 2014 Adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.
- See more at: http://research.nelson-hall.com/sourcing-expertise/government-bpo/?avpage-views=article&id=201919&fv=2#sthash.0FvrNKMr.dpufThe profit warning came on the same day that Serco announced clearance by the U.K. government to bid for new contracts. Serco announced that it expects a mid-single digit percentage organic decline on 2013 revenue due to a number of factros including:
- Lower levels of incremental work won across the group to date
- Attrition from contracts lost such as electronic monitoring
- Volume reductions in its Australian immigration detention services contract.
Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2012 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal program.
In 2014, Serco expects continuing additional costs of up to £40m related to the corporate renewal programme, external advisers and further restructuring.
Market consensus for 2014 adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.
Serco's financial woes have been compounded by a change of Government in Australia, its second largest market. Tony Abbott, the new prime minister, has pledged to stop the flow of boat people into the country by shifting the work to overseas centers. This has resulted in a decline in volumes in the detention centers that Serco manages under contract for the Department of Immigration and Citizenship.
On another front, in January, Serco's health provision in Suffolk was criticized after a four-month NHS review found services were being provided safely but improvements were needed. The areas for improvement were reported to include staff morale, recruitment and retention, communication with GPs and commissioners, equipment stores and procedures at the Ipswich care co-ordination centre.
Serco has been implementing a major corporate renewal plan as part of its negotiations with the Cabinet Office. As well as extensive management changes, and a renewed and refreshed code of conduct and governance, Serco has committed to creating a separate division for its U.K. Central Government work to increase focus and openness for Government as a collective customer.
Other key measures include:
- Enhancing transparency and access, with reporting of operational and financial contract KPIs, and greater engagement of customers at contract and departmental level.
- Establishing formal Ethics Committees and Ethics Officers in each division, accompanied by the redesign of its whistle-blowing process to the highest international standards
- Measuring the progress of attitudinal change throughout the organization with ongoing independent culture and ethics reviews.