Interserve Plc 2011 Annual Report and Financial Statements Interserve Plc Every day, we’re planning, creating and managing the world around you. 2011 Annual Report and Financial2011 Statements INTERSERVE ANNUAL REPORT 2011 OVERVIEW HIGHLIGHTS Across the world, people wake to a new day. We help make it a great day. PROUD OF THE Every day people wake to put We help build and look after this their plans, dreams and goals world and we do this through the VALUE WE CREATE IN into action. lasting relationships our people have built with a range of partners PLANNING, CREATING, To make this happen they need the and clients worldwide to ensure we places around them – their schools, AND MANAGING THE create value for everyone involved. their workplace, hospitals, shops WORLD AROUND YOU and infrastructure – to function well, to support, inspire and add value to their lives. FINANCIAL HIGHLIGHTS HEADLINE EPS* PROFIT BEFORE TAX FULL-YEAR DIVIDEND 49.3p £ 67.1m 19.0p + 15% + 5% + 6% VIEW 2011 ANNUAL REPORT ONLINE: HTTP://AR2011.INTERSERVE.COM INTERSERVE ANNUAL REPORT 2011 OVERVIEW HIGHLIGHTS Across the world, people wake to a new day. We help make it a great day. PROUD OF THE Every day people wake to put We help build and look after this their plans, dreams and goals world and we do this through the VALUE WE CREATE IN into action. lasting relationships our people have built with a range of partners PLANNING, CREATING, To make this happen they need the and clients worldwide to ensure we places around them – their schools, AND MANAGING THE create value for everyone involved. their workplace, hospitals, shops WORLD AROUND YOU and infrastructure – to function well, to support, inspire and add value to their lives. FINANCIAL HIGHLIGHTS HEADLINE EPS* PROFIT BEFORE TAX FULL-YEAR DIVIDEND 49.3p £ 67.1m 19.0p + 15% + 5% + 6% VIEW 2011 ANNUAL REPORT ONLINE: HTTP://AR2011.INTERSERVE.COM INTERSERVE ANNUAL REPORT 2011 OVERVIEW HIGHLIGHTS INTERSERVE ANNUAL REPORT 2011 OVERVIEW HIGHLIGHTS AND CONTENTS 01 OVERVIEW HIGHLIGHTS 01 CHAIRMAn’s stATEMENT 02 OUR BUSINESS 04 OUR MARKETS 06 OUR STRATEGY 08 OUR WORK 10 BUSINESS REVIEW CHIEF EXECUTIve’s Q&A 14 OPERATIONAL REVIEW 16 PRINCIPAL RISKS AND 22 UNCERTAINTIES FINANCIAL REVIEW 24 SUSTAINABILITY REVIEW 30 GOVERNANCE DIRECTORS AND ADVISERS 36 KEY FacTS DIRECtors’ reporT 38 CORPORATE GOVERNANCE 44 Over 50,000 people in our FUTURE WORKLOAD DIRECtors’ REMUNERATION 52 REPORT workforce worldwide DIRECtors’ RESPONSIBILITY 63 Record-low all-labour STATEMENT accident incidence rate (AIR): £5.6bn 310 per 100,000 workforce +6% FINANCIAL STATEMENTS GROSS OPERATING caSH INDEPENDENT AUDItors’ reporT 64 NET DEBT (CONSOLIDATED FINANCIAL CONVERSION* STATEMENTS) CONSOLIDATED FINANCIAL 65 STATEMENTS 118% £42.2m NOTES TO THE CONSOLIDATED 71 FINANCIAL STATEMENTS + 38%pts - 18% COMPANY FINANCIAL STATEMENTS 108 PRINCIPAL GROUP UNDERTAKINGS 117 FIVE-YEAR ANALYSIS 125 SHAREHOLDER INFORMATION 127 * See notes 10 and 31 to the consolidated financial statements on pages 85 and 106 respectively for a reconciliation of non-statutory measures to their statutory equivalents. 02 INTERSERVE ANNUAL REPORT 2011 OVERVIEW CHAIRMAn’s STATEMENT “ I am pleased to report a year of significant achievement and progress for Interserve. In continued difficult markets we have delivered growing earnings, strong cash flows and an improved order book. At the same time we have undertaken significant new developments towards our strategic objectives to grow shareholder value.” Lord Blackwell Chairman In recent years the Group has begun a in bidding to support the Ministry of Managing long-term client significant transformation in the scope Justice in its framework programme for relationships is a major strength of our business, applying our core management of offenders. and one of the key ingredients in the skills in new markets where we believe excellent forward visibility of our future Overseas we have invested in we can both grow and deliver high workload. The actions we have been developing the scope of business value. taking in Support Services should activities in our existing high growth continue to improve margins. There In the UK our Support Services markets as well as extending into major are also indications that the recovery business, as well as taking steps to new territories – such as Saudi Arabia, in Equipment Services’ international improve customer value, efficiency and India and the USA. markets, begun in the second half of margins in our existing markets, has We believe the ongoing opportunities 2011, will now be maintained. Together invested in extending our management for continuing this transformation of we anticipate these developments skills into new areas of outsourcing our business - both in the UK and can more than offset the short-term activity. During this last year, for overseas - provide significant upside impact on Construction’s performance example, we started up our innovative potential in the medium and long term, resulting from the current margin and partnership serving the Department notwithstanding the ongoing economic volume pressures. for Work and Pensions in its Work uncertainties. This is the primary Programme, and are now shortlisted engine for achieving our growth ambitions. INTERSERVE ANNUAL REPORT 2011 OVERVIEW CHAIRMAn’s STATEMENT 03 OVERVIEW Chairman’s statement Doing the important things well B USINESS REVIEW GOVERNAN C E This year I am reporting separately on development opportunities including the role and effectiveness of the Board apprenticeships and a ‘Skills for Life’ in our Corporate Governance review. numeracy and literacy programme. We However, on behalf of the Board I also run return-to-work schemes for would like to thank all of our people the long-term unemployed. for their continued commitment and Reflecting our confidence in the Lord Blackwell Chairman for their willingness to go the extra 29 February 2012 medium-term prospects and in our FINAN mile in delivering outstanding service strategy for developing the Group, to our customers. The success of we are recommending an increased our business is founded on having final dividend of 13.0p (2010: 12.4p), the right people and supporting C bringing the total dividend for the year IA them in their development. One of to 19.0p (2010: 18.0p), an increase of L our key programmes identifies and STATEMENTS 5.6 per cent. The final dividend will be develops the people who will form paid on 24 May 2012 to shareholders the core of our senior leadership on the register at the close of business in the years to come. We offer all on 10 April 2012. our people a wealth of training and 04 INTERSERVE ANNUAL REPORT 2011 OVERVIEW OUR BUSINESS Interserve offers good prospects for long-term value and growth, underpinned by a strong balance sheet and cash flows which enable an attractive dividend yield. SECTORS (by GrOss revenue) 1% JUSTICE 1% 13% HEALTH 15% 13% EDUCATION 15% 15% DEFENCE 15% 23% COMMERCE 23% 8% 8% INDUSTRY 14% 11% INFRASTRUCTURE 14% 11% CENTRAL/LOCAL GOVT OUR EXPERTISE STRENGTH AND RESILIENCE • Listening to and understanding our • Our Group combines businesses with • Our international risk is contained clients’ needs, so that we can design differing working capital profiles and by operating through strong local a bespoke solution, is at the core of requirements, generating a high overall partnerships and by deploying key our offering. conversion of profit to cash through people into our international operations. economic cycles. • Our added value comes from: • We have reduced our pension funding • Our earnings are diversified both risk by utilising the value of our PPP • Combining front-end design and geographically and through business investments. consultancy with programme and sector mix, enabling us to management and delivery skills capitalise on different phases of market under one roof. growth in global cycles. • Managing change, whilst at the • Our UK construction activities are same time maintaining, or enhancing de-risked through an emphasis on service quality. long-term framework contracts. • Nurturing and managing a complex supply chain, often comprising small and medium-sized enterprises, to offer the optimum combination of global and local inputs. INTERSERVE ANNUAL REPORT 2011 OVERVIEW OUR BUSINESS 05 OVERVIEW Our business How we create shareholder value BUSINESS REVIEW GEOGRAPHIC GROWTH PROSPECTs – (by contribUtion tO tOtal MARKET POSITIONING operating prOfit) • We are positioned to take 11% advantage of growth in the REST OF WORLD 11% UK support services and infrastructure markets in both the public and private sectors. GOVERNANCE 24% 65% MiDDLE EaST & AFRICA 24% • around 35 per cent of our profits are from international markets, where we have access to growth UNITED KINGDOM 65% in infrastructure spend and to opportunities for support services contracts as markets mature. • We have proven expertise in exporting our core UK skills to build a presence in emerging markets. SEGMENTAL (by contribUtion tO tOtal operating prOfit) 43% 37% 14% 6% FINANCIAL STATEMENTS SEGMENTAL (by GrOss revenue) 46% 40% 7% 7% SUPPORT SERVICES CONSTRUCTION EQUIPMENT SERVICES INVESTMENTS 06 INTERSERVE ANNUAL REPORT 2011 OVERVIEW OUR MARKETS Interserve operates in the outsourced services and construction markets in the UK and internationally. Our markets OUTSOURCED SERVICES UK International • The market includes facilities • The FM market – which represents • almost all international markets for management (FM) – i.e. activities only a fraction of our addressable