Serco : 2024 Annual Report and Accounts

Strategic Report

Corporate Governance

Financial Statements

Definitions for each KPI can be found in the Glossary on page 229

See pages 20 to 25 for more information on our business

Strategic Report

Corporate Governance

Financial Statements

Strategic Report

At a Glance continued

Corporate Governance

Financial Statements

16%

Asia Pacific

Revenue by division (%)

25%

North America

55%

Strategic Report

Chair's Statement

Corporate Governance

Financial Statements

John Rishton

Chair

The Board's main areas of focus in 2023 were to ensure a successful transition to a new Group Chief Executive and to support Management to improve employee engagement, health and safety, and improve contract wins rates.

• Mark Irwin became Group Chief Executive on 1 January 2023. The handover from Rupert Soames, his predecessor, was smooth and Mark has settled well into his role as the leader of the organisation. He has sharpened the focus on operational aspects of our business, on health and safety and is driving performance with more emphasis on customers, colleagues and capabilities.
• Health and safety has always been extremely important to us and was a key focus in 2023, following a higher number of incidents in 2022. This year saw a reduction in both the severity and number of incidents.
• Employee engagement moved from 70, already a high level, to 71. We continue to evolve our employee value proposition and it was pleasing to see the improvement, especially given the tight labour market conditions and cost- of-living crisis.
• Contract win rates were good for both rebids and new work in the year, reversing the dip experienced in the second half of 2022. This included the strategically important rebid of our Centers for Medicare & Medicaid Services (CMS) contract in the US.

Strategic Report

Corporate Governance

Financial Statements

Our performance

The Company delivered good results in 2023, with revenue, underlying operating profit and cash all increasing. The immigration and defence sectors both saw strong demand and the justice sector also grew. Governments around the world are facing ever more complex challenges. Serco's significant expertise across sectors and geographies gives us a competitive advantage to support governments to address these challenges.

Acquisitions are an important part of our strategy, and in 2023 we agreed to buy two businesses, European Homecare (EHC), and Climatize. EHC, which completed in March 2024, is a leading private provider of immigration services in Germany. In conjunction with ORS, the Swiss-based business we acquired in 2022, this strategic acquisition will create a strong partner for European governments in immigration services and complement the support we already provide to government customers in the UK and Australia. Climatize, which completed in January 2024, is a small but fast-growing business that operates in the United Arab Emirates and the Kingdom of Saudi Arabia, offering zero-carbon advisory and related engineering services. The business will significantly boost Serco's sustainability advisory capability in the Middle East with opportunity to scale this across our

other geographies.

It was also very encouraging to see the success of some of the acquisitions we have made in recent years. Revenue at ORS in 2023 was more than double the level of 2021, the year before we acquired it. Bringing together Serco's capability with ORS's European operations enabled the business to scale up in a way that would not have been possible as a standalone entity. In the US, we have seen strong order intake in the defence sector over the last two years, which was made possible by combining skills from Serco with the NSBU and WBB businesses we acquired in 2019 and 2021, respectively.

Returns to our shareholders increased again in 2023. Consistent with our stated capital allocation priorities, we progressed with our plan of increasing ordinary dividends, as we continue on our path to reduce dividend cover progressively towards 3x over the coming years, and returned another £90m of surplus capital to shareholders through a share buyback. The Board is recommending a final dividend of 2.27p which is an increase of 18% year-on-year and has agreed a further £140m share buyback for 2024.

Strategy

Serco operates in very large, growing markets. The focused business-to-government (B2G) operating model established over recent years is delivering competitive advantage and differentiation, and we believe that this will enable the business to grow its revenue faster than the market, profit faster than revenue and to convert that profit into cash. The strategic framework has delivered strong results in recent years and remains unchanged. Mark Irwin is bringing a sharper focus to our operational performance that will seek to make our business even better in the coming years. Three strategic enablers - Customers, Colleagues and Capabilities - were identified and laid out in our 2022 Annual Report. We have made good early progress on these in 2023. Successful execution of our strategic priorities should improve contract delivery for customers and improved efficiency in our operations; and we believe that the Group is well positioned to deliver our medium-term growth targets.

diversity and effectiveness, remuneration, financial reporting, as well as environmental and societal considerations.

We have a dedicated Risk Committee and we detail our approach to risk on pages 32 to 46. There were no changes to Non- Executive Directors during the year.

Our Board tries to enhance its effectiveness by being close to Serco's people and operations. During 2023, I visited our businesses in North America, the UK, the Middle East and Australia. In May, we held our Board meeting in Italy where some of our key European contracts are based. Our European business has grown significantly over the last few years and this gave the Board the opportunity to spend time with the European leadership team and meet employees and customers to discuss key areas such as immigration and space. Your Non-Executive Directors (NEDs) also visited contracts, spending time with the contract teams and customers in our various markets and participated in our annual regional conferences.

Dame Sue Owen is the Board's employee representative. We have a dedicated employee working closely with her and the wider Group to ensure that the Board understands employee perspectives and issues. In addition, all NEDs participated in virtual and face-to-face meetings with employees in each of our markets to discuss topics that were important to them. We also have an 'Ask the Board' function, where employees are given the opportunity to anonymously raise issues for our attention. In a year where many businesses, including ours, wrestled with the challenges of a tight labour market and a cost-of-living crisis, I was pleased our vacancy rates reduced significantly and engagement scores increased to 71.

ESG has always been important to Serco and, as demonstrated in the Our Impact section on pages 49 to 69, we continue to adapt and develop our thinking and embed this into our strategy. We have been clear on our purpose, values and impact on society for many years. Our customers are governments and frequently the contracts we enter into have specific measures for areas such as Social Value and other ESG aspects. With our strong purpose, mission and vision we believe we are well positioned to deliver positive outcomes as we focus on our impact and the themes of People, Place and Planet, all underpinned by strong governance. More detail on our approach and ESG commitments and performance is included on pages 49 to 69.

Our Board evaluation during the year was an internal review and the results were discussed at the December Board meeting. We took account of last year's feedback when deciding the areas to be covered by the Board in 2023. The evaluation concluded that the Board and its Committees continued to operate effectively. Further information on this review process and the outcome are provided on page 104.

Looking ahead

Governments around the world continue to face complex, fast- moving challenges on multiple fronts. I believe the strategic positioning of Serco means we are well placed to be a partner that can deliver sustainable value to governments. If we can be responsive, agile and demonstrate value, I am confident we will deliver sustainable and profitable growth, and create value for all our stakeholders. To finish, on behalf of the entire Board, let me express our profound appreciation to the hardworking employees of Serco, and our many partners, for their incredible commitment and achievements during 2023.

Corporate Governance

One of my most important roles as Chair is to ensure that Serco has strong governance and risk management. These responsibilities cover many areas (and are covered in detail in our Corporate Governance report on page 94), including Board

John Rishton

Chair

1 March 2024

Strategic Report

Corporate Governance

Financial Statements

Mark Irwin

Group Chief Executive

Highlights

• Revenue: grew by 7% to £4.9bn, organic revenue growth of 4%.
• Underlying operating profit: increased by 5% to £249m, a margin of 5.1%. More than 60% of Group underlying operating profit derived from outside the UK(1).
• Underlying earnings per share: increased by 10% to 15.36p.
• Cash flow: free cash flow very strong at £209m, trading cash conversion of 111%.
• Adjusted net debt: better than previous guidance at £109m; covenant leverage at 0.5x EBITDA.
• Order intake: £4.6bn of wins, order book remains strong at £13.6bn.
• Pipeline: pipeline of potential new work of £10.1bn, +28% since half year, highest level in a decade.
• Dividend per share: recommended final dividend per share of 2.27p, +18% year on year.
• New £140m share buyback in 2024: continuing to return capital to shareholders as a result of strong trading and cash conversion consistent with our capital allocation priorities.
• Updated guidance for 2024: Revenue and underlying operating profit unchanged, net debt updated to include better 2023 outcome and new share buyback.

Strategic Report

Corporate Governance

Financial Statements

In 2023 we made good progress towards building a resilient international platform for growth in the government services sector. We delivered growth in revenue, profit and cash, with all three financial performance measures ending the year better than our initial guidance. We have also made good progress executing our strategy with clarity about our Purpose

• to impact a better future; our Vision - to be the partner of choice to governments globally; and our Mission - to bring together the right people, the right technology and the right partners to support our government customers with solving some of the most complex problems that they face.

We grew revenue by 7% to £4.9bn, with organic growth of 4%, acquisitions adding another 4% and a 1% drag from currency. Underlying operating profit increased by 5% to £249m and our cash generation was again very strong, with 111% profit to trading cash conversion.

In North America, which generates close to half our profit, organic revenue growth was strong. We secured the rebid for our CMS contract, one of the largest and strategically crucial contracts in the Group and we strengthened our order book with excellent rebid success. Within North America, Canada continues to grow, and we are seeing our focus on global collaboration bear fruit with success in winning employment services work in Ontario, as we entered the sector for the first time by leveraging our longstanding work in the UK.

Our UK business delivered high organic revenue growth, margin improvement and good conversion rates for new wins and recompetes. In Europe, the successful integration of ORS, which is now delivering revenue more than double the level prior to us acquiring it, has strengthened our position in immigration services. We have followed that with the acquisition of European Homecare, a German immigration services provider which will complement the work we do to support governments in the UK, Australia and across Europe.

Our Middle East business had a good year. Although profit reduced slightly, order intake was high as we saw success in executing our strategy of repositioning Serco for higher margin growth in the most dynamic markets in the region. The development of an advisory business has helped us win work in new segments, such as sustainability services at the Red Sea Global megaproject and has expanded our presence in the exciting new giga-cities of Saudi Arabia.

Our Asia Pacific business had a difficult year. Volume-variable work, which as part of a portfolio we expect to ebb and flow, reduced in the period, tight labour markets created operational challenges and new business wins did not meet our expectations. We took appropriate action, appointing a new CEO for the business and implementing the necessary business changes to ensure we are well positioned for future opportunities in what remains an important market for Serco.

In summary, we are pleased with the full year results for 2023 which were the direct result of the hard work and dedication of more than 50,000 colleagues across the Group. For that we remain grateful, as we do for the continued trust of our customers and the support of our shareholders.

After my first full year as Group Chief Executive, I am confident that we enter this next stage of Serco's development with strong foundations and a strategy aimed at delivering profitable, sustainable growth aligned to our medium-term goals. We enter 2024 with the largest pipeline of potential new work in a decade, a business plan to deliver margin improvement from a rigorous approach to operational efficiency, a network of partnerships to support technology enablement and a robust balance sheet providing good optionality for capital allocation. We therefore see clear opportunity to sustain the consistent positive results reported in recent years.

Mark Irwin

Group Chief Executive

Serco - Impact a better future

1 March 2024

To me, impact is not about one existential event. It is about a mindset that says everything we do matters. How we do it matters, and the outcomes of what we do matter; then it is about finding a way for us to be able to measure that and be accountable for those better outcomes by working in partnership with our clients to impact a better future.

Strategic Report

Group Review

Corporate Governance

Financial Statements