Ladies and gentlemen, thank you for standing by, and Welcome to today's Serco conference call regarding the acquisition of WBB. At this time, all participants are in listen only mode. After the speaker presentation, there will be the question and answer session. To ask a question during the session, you will need to press star and one on your telephone keypad. I must advise you that this conference is being recorded today on the 16th of February, 2021. I would now like to hand the conference over to our first speaker today, Rupert Soames. Please go ahead, sir. Good morning, everybody. It's Rupert here, and joining me on this call, we have Angus and Nigel, and Paul Checketts, and Jamie Hastings from UK Group, and also Tom Watson, who has got up especially early, who's our SVP of Defense Services in the U.S. I would remind you that our presentation is on our website if you want to follow it. I'm going to go through that. It'll take about 15 minutes going through that, and then we'll get into Q&A. It is not often that I use the word excited, but genuinely, we are excited about this acquisition because it is a vital piece of the jigsaw that we are creating around our presence in the largest defense market in the world. It's the acquisition of WBB, Whitney, Bradley & Brown, for a consideration of $295 million on a cash-free, debt-free basis, payable on completion. I'm now on slide three of our presentation. In terms of size of the business, we expected to have revenues in calendar 2021 of GBP 230 million, and to produce UTP of about GBP 28 million. It had margins of 13% in 2020, but we are planning on them being a bit lower than that, 11%-12% probably going forward. If they do decline slightly after that, we're fine because we've got synergies that will maintain them at that level. We're reasonably confident we'll be able to keep margins up at that level going forward. In terms of acquisition multiples, it's more expensive than other acquisitions that we have bought. You'll remember that we bought the healthcare business of Carillion on almost no multiple. I think it was 4x the acquisition that we've recently done in Australia of an FM business, we paid 6x. MT&S, the NSBU acquisition, we paid about 8, and this one we're paying about 10.2x EBIT to prospective EBITDA. The reason why we're paying more is because we think that's justified by the higher margin of the business, the significant amount of capability and technology it brings us, and I would say it is still a substantial discount to what the quoted peers who are in this space would be on the U.S. In terms of EPS accretion, we expect 10% in 2022, and to achieve ROIC in greater than WACC, in the third full year of ownership. Being paid for out of debt, it'll take our leverage up to about 1.6x the first half of 2021, which will then decline thereafter. That also takes account of the share buyback that we've announced in December. We'll be comfortably within our one to two times range. Going over to slide four, the strategic rationale for this business. You will know that when we bought the naval business of Alion, the naval systems business unit, we are very keen, were, and remain very keen on Navy as probably, as generically the fastest growing part of U.S. defense expenditure. That doesn't mean to say that we don't want to be present in other areas, and we had it in mind that if we were to get into places like the Army and the Air Force and increase our presence there, these are areas of business that are incredibly hard to enter from an organic point of view. We have quite small businesses in those areas, it's hard to get traction. We had it in mind that we would have to do two or three discrete acquisitions along the way of smaller businesses to build up a portfolio. Actually, WBB have done that for us. They have built up this reach across Army, Air Force, and the Department of Defense as well. It grows the scale of our defense business in the U.S. by about 20%. It increases our reach, because it brings new customers and hard-to-reach customers to us. Critically, it brings a whole raft, a stable of new capability, which is probably at the higher end of what we've got in Serco. They are strong in video analytics, data analytics and AI and machine learning. They're strong in cyber consulting. This take gives us a whole step up in capability in terms of our defense business. In terms of cost synergies, we are expecting synergies of around GBP 4 million a year. If that sounds like a small number on an acquisition, the answer is the gross synergies are about GBP 9 million, half of that goes back to the customer in terms of the lower rates. Those lower rates should make us more competitive. The amount that we see coming into our own P&L from those GBP 9 million of synergies would be about GBP 4 million a year from 2023. A large proportion of those synergies are actually related to property rather than people. Going on to slide five. The overview of WBB. Well, the thing is, it does much the same that we do throughout our business. It does a lot of acquisition and program management. It does systems design and engineering, and it does through-cycle asset management, just as we do for the Navy. We are in the process of bidding on two jobs together. We feel there's a very good cultural fit and there's a very good understanding of each other's business. The difference with WBB, as I say, they are at the higher technical end. In terms of their customer base, it's reasonably well-balanced between Air Force, Space Force, U.S. Army, U.S. Navy, and Marine Corps, and Department of Defense, and Homeland Security. They've got about 1,000 people, including about 200 people who are what's called subject matter experts. These are highly technical people, many of them ex-forces. Of the 1,000 employees, about 80% of them are cleared, have some sort of security clearance, which is a very high proportion for a business of this type. They have a great reputation for quality and excellence. We've been able to confirm that indeed. Also, as I say, a lot of our people know a lot of their people, so we're comfortable with their reputation. They've got these strong relationships through these SMEs in customers who are really hard to get into, like the Missile Defense Agency, and the Army Space and Missile Defense Command, and in the Pentagon, and in various security agencies that dare not speak their name. In terms of their financial record, they've had about 10% revenue CAGR over the last three years. They got a very respectable order book for this type of business, including options for extensions, and we don't normally include those in our own order book. It's about GBP 430 million or 2x 2020 revenues. If you exclude the options, it's about GBP 100 million or six months forward order book, which for this sort of consulting business is actually pretty good. They have themselves done acquisitions. They bought a company called Decisive Analytics, and another one called BRTRC back in 2019. Those brought with them revenues respectively of GBP 56 million and GBP 41 million. This is what private equity does. They go and assemble these businesses. What we are doing by acquiring the business a year after that, I think They have integrated these pretty well. A lot of that initial pain and risk of integration, we think has now been retired. We've spoken to management, and we seem to get on pretty well. Moving to slide six, the actual marketplace itself. Clearly, it's been a strategic objective of ours to expand our position in the U.S. market. It's the largest, most liquid, most active defense market in the world. We have looked carefully and thought carefully about the impact of a Biden administration on the business, and we're pretty sanguine about that. We think that actually where the sort of high-tech spaces where WBB operate will be well protected from any cuts in defense expenditure. It's quite interesting to note that if you go and take the major quoted peers in the sector like Booz Hamilton, CACI, SAIC, and Leidos, none of their share prices moved significantly with the election of the Biden administration. The market does not believe that there's going to be a major change in defense spending. The nature of the U.S. defense business is incredibly organized around communities, which, as I say, are very hard to penetrate. You could go and sit in Huntsville, Alabama, for 10 years, making Google eyes at the generals there and get nowhere. The business that they bought, BRTRC in Huntsville, has about 50 people there. It's taken them 20 years to grow to this stage where they have access to Space Force and Air Force people. If we try to do that just by bidding for stuff, your chance of winning is pretty small. They will also have some key programs. They're on the F-15, the F-16, the F-35, and also on the B-52. They have a big presence in what's called PNT, position, navigation, and timing, which are major programs called programs of record. They're in the federal budget that we can see they've got secured funding. They also operate with the Army Research Lab and the Rapid Capabilities Development Office, which I think gives you an idea of the sort of level at which they are operating. To talk a little bit on slide seven about some of the actual programs themselves. At the headquarters of the Department of Defense, one of the things that we've had to struggle with throughout these presentations and statements is defence spelled with a C and defense spelled with an S, and not always getting it right. In the Office of Secretary of Defense, that's the Pentagon, that's the Department of Defense headquarters. They are what's called the primary systems engineer for a number of different programs, including programs for ships, tanks, aircraft, radios, and software assets. We have to be careful about what we talk about, because a lot of what they do is very highly classified. As you can imagine, the U.S. Army Space and Missile Defense Command, where they help them develop counter-threats to incoming missiles. The U.S. Army, they are supporting a program called C-RAM, which I'll talk about a little bit more in a moment. Missile Defense Agency, they are responsible for all the cyber risk assessments within the Missile Defense Agency, which I mean that is quite a hefty responsibility doing that work. As I mentioned, they are very heavily engaged in what is Delphically called precision timing. Those applications work across all parts of the U.S. Defense Force, Air Force, Army, Marine Corps, and Coast Guard. If you go on to then slide eight, this is an attempt to show how the jigsaw works. At the top, what we've got are the different capabilities in terms of acquisition program management, capabilities developed, data analytics, modeling, simulation, all along the top. The particular market segments below. You can see that what WBB bring us is reach across not only technical capability, but reach as well across different customers. That's a pretty attractive footprint to have in the U.S. defense, in the services space. Very few companies would have that sort of footprint. Interestingly enough, what this does, although we still have about 60% of our revenues in Navy, what we will have is four other businesses with revenues of about between $80 million and $120 million in each of those spaces, in Air Force and Space Force, in Army, and in the DoD. If you're doing $80 million to $100 million of services to the defense of the DoD or to the Army, you are a reasonably serious player in that space. We're happy that it fits in well. It fills in the jigsaw well. Going to slide nine on some of the photographs. Top left is the F-35, our beloved F-35, because that's what the U.K. has bought in large numbers. They are involved in the F-35 program. On the satellite stuff, let's just call it precision timing that they are involved in. At the top right is a photograph of a thing called C-RAM, which stands for Counter Rocket And Mortar And Artillery. Basically, that is the same technology that we support in the Navy on a thing called CIWS, which is basically a Gatling gun and very, very fast reaction radar that is so fast that it can actually blow up an incoming missile or an artillery round or whatever. They are involved in the Army equivalent of that. Bottom left is the Army Missile Defense Agency, which is trying again to shoot down incoming missiles. Bottom right is a very interesting program where they are designing, along with an Israeli company called Elbit, the forward communications operations base for Army deployment. That is a huge program. WBB are the design authority for that program, which is central to Army capability in terms of forward deployment, not yet in production yet, but interestingly enough, within our own naval business, we have the capability to go and assemble kit as we do on the CAEMS program. Going to slide 10, you'll see how it changes the balance of group revenue, not hugely. It's got quite a big impact on group underlying trading profit, about 13% uplift on group UTP. In terms of defense, it increases our defense from 28% of revenues to 31%, and it increases the scale of the North American business in our overall revenues, being about 30% of group revenues. It will give us a business in North America with revenues of about GBP 1.7 billion and about 9,000 employees. It's a very substantial part of the group. Moving to slide 11, summary. We think that this is a strategically compelling acquisition. It fits really well with our existing business. It is in a space that we know well, which is the engineering and technical services space. It is in what you might call the top right-hand corner, the bullseye of our strategic intent to build up our U.S. Defense business. It creates this platform that allows us to credibly reach nearly all areas of Defense expenditure, and we think gives us, whilst we were delighted by the scale and size, we're happy to be in the Navy, actually, we're even happier to also have credible capability outside Navy and into the Army and the Air Force and Space Command. It adds scale, it adds reach, it adds capability, and it creates a strong and diversified platform for future growth in U.S. Defense. It's got attractive financial returns, and we can do it while maintaining a solid balance sheet. At that point, to everybody's relief, I will throw it open to questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for a name to be announced. The first question comes from line of Paul Sullivan from Barclays. Please ask your question. Yeah. Good morning, everybody. Just firstly, could you talk a little bit more about the due diligence, given it has been fairly acquisitive, and could you give a bit more color on Decisive Analytics in particular? It sounds like that's fairly high growth, high margin within the mix. Could you just talk about renewal risk in the shape of contract attrition? Scope for revenue synergies and the size and shape of their pipeline. Thank you. Right. I'm going to ask on the DD. We felt that we got good access on the DD. They know that we wanted it. It was not a particularly hurried process, and we were able to do confirmatory DD at the end, and we got access to the materials that we needed. Bear in mind that the U.S. business, this is actually the third acquisition that they've done. They will have had some experience on that. I'm going to ask Tom to just answer about the DAC, what Decisive Analytics do, and also the renewal risk, and I will come back to me for the synergies. Tom, do you want to just talk about Decisive Analytics? Yeah, absolutely. Yes. Good morning. Yeah. Decisive Analytics, what they brought, first of all, is customers present specifically in Huntsville, Alabama, which is one of the largest federal markets and defense markets in the United States. In particular, their base of business came through the Missile Defense Agency and the Army's Strategic and Missile Defense Command. Their particular capabilities revolve around big data analytics, cybersecurity, lifecycle logistics, machine learning. They also had some media integration work and systems engineering. They had, I would say, the front end of the development life cycle for their customers. The question on pipeline. Overall, WBB has a very strong pipeline. They have very large numbers relative to the size of the business. They've got a very strong book of business that's currently bid, waiting under evaluation. Roughly one times the business size, which is quite healthy. Back regarding the question of due diligence, I've spent a tremendous amount of time analyzing the pipeline as part of that process. Got very, very comfortable around the pace of the pipeline and the maturity of the pipeline, and find that it's, like I said, it's quite healthy for the business. It provides a platform for sustained growth over the near term and through the next five years. Thank you. Tom, just talk a bit about renewal risk. Renewal risk, well, in the U.S. market, which tends to have shorter contract durations, sometimes three years to five years, there's always a cycling of rebids going through. In the short run, there's not a substantial amount of rebid risk here. One of the things we like about this portfolio is just, I'd say, the diversity of the portfolio. There's depth across multiple customers, you get a balanced risk portfolio there platformed from a rebid risk perspective. Right now there is a couple of small contracts in their portfolio that are up for rebid in the short run, but nothing of material nature. If I can just talk a little bit about synergies. In terms of revenue synergies, we're hinting at these rather than trumpeting. I think there will be revenue synergies in the U.S. The fact is that whilst the renewal risk may not be very high, one of the reasons it's not very high is that these subject matter experts are experts in very limited subject matter, and also often very highly classified subject matter. The idea that we can take some of these experts and this expertise and go and pitch it into the UK MOD, we'd have to be very careful about how we did that because naturally, this is going to be of highly classified, and we respect that. We've been operating under a special security arrangement for many years now in the U.S., and I think that we are respected for the way that we treat that. There will be within the U.S. and within the DoD, there will be the ability-- I was talking to some of their managers, and one of them described and said, "For us, this is opening the aperture. It is giving us a greater ability, for instance, on cyber, to take that into the Navy and into other areas." I think there will be some revenue synergies. That, for us, is sort of the upside if we can get that. We don't need those upside revenue synergies in order to be able to make our plan. I hope that answers your question, Paul. Yeah. That's very clear. Just to wrap up, in terms of your expectations for organic revenue growth then, what would you say is your base case? Well, what you see is our base case is actually quite flat in 2021 on 2020 for the very simple reason that we've never seen somebody do an acquisition and there not be some form of hiccup in the first year. In our planning, we're not assuming a lot of growth in 2021. Long term, we think that this business can grow between 5% and 10%. Right. That's very clear. Thank you very much. Thank you. The next question comes from line of Kean Marden from Jefferies. Please ask your question. Morning, all. I've got one other quick numbers one as well. If we look at the revenue base of the business that was disclosed back in 2012, it was about GBP 130 million. Then if we add on the M&A contribution that you kindly provided, Rupert, that gets us to about GBP 210 million of revenue, GBP 220 million, which looks pretty similar to the revenue, the GBP 212 million for the December 2020 year. Is this another business that maybe declined between 2012 and sort of 2016, 2017 and then restores to growth? Is this something else that's driven the shape of that? Then secondly, on M&A, slide eight's really helpful. Thank you for that. Would that suggest that you have maybe one or two other bolt-ons to round off your U.S. capability? You're now pretty much done in the States, and therefore, we should expect future M&A to be maybe in some of the other divisions. Thanks. If I can just take that. We know that the organic growth over the last three years has been about 10%. It is absolutely true that with the major drawdown and withdrawal from Afghanistan, there was a decline in defense expenditure and the whole sector went backwards. I think that WBB, before they were bought by private equity, had a pretty traumatic time as much with their management as anything else. We're happy that that is now settled. No business is immune from what happened in the defense sector from 2012. What we do know is that they've done 10% organic growth over the last three years, which is kind of what we're interested in looking at, which does imply that they went backwards maybe between 2012 and 2015, which wouldn't enormously surprise us. On the second thing of the other opportunities to do more in the U.S. space, sure, but it depends on opportunities. We think that this takes us to a level where we can be pretty comfortable in our own skin, and if there are other opportunities to acquire, we of course will look at them. This is a, to use that much hackneyed phrase, this changes our game in the U.S. in terms of the scale and spread and reach and capability that it gives this business. Congratulations, Kean, on going back to 2012. Thank you, Rupert. Very kind. Right. Thank you. Next question, please. Thank you. The next question comes through line of Oscar Val from JPMorgan. Please ask your question. Good morning, everyone. Congratulations on the deal. I have two quick ones. The first one may be a bit more on the characteristics of the business. Could you just comment on how much is cost plus versus fixed price, and how that differs with your existing U.S. business? Then maybe the second question on the management team, what are your initial plans? Are they mostly sticking around? Oscar, I'll take the second one of the management team. Tom, do you want to just talk about the difference in balance between fixed price and cost plus and time and materials? Yes, absolutely. Yeah. I can pull up the exact numbers in a moment here, but they have a pretty well. Tom, let me give you the numbers. You have the numbers? Yeah. 48% is cost plus, 32% is time and materials, and 20% is fixed price. It's a good balance between the three types of contracts. What we see relative to our existing U.S. defense portfolio is more of a bias toward the time and material and fixed price contracts, as we have a lot of, for example, our Navy business in the U.S. is principally cost plus, and therefore has a slightly lower margin associated with it. That bias toward the fixed price and the time and material tends to generate a higher margin, which is what you see in this portfolio here. Oscar, remind me of the second question. It was just on management. Oh, management. Yeah. Yeah. I have to say that we believe they intend to stay. There's certainly one who we know is going to retire in the autumn. Robert Olsen, who is the chief executive, is an incredibly capable and impressive guy. I have spoken to him on several occasions, and he says he wants to stay. I would say that it is a quite remarkable achievement of the U.S. team that not a single senior manager has left, what we now call MT&S, the naval acquisition of the naval systems business unit. We hope that we make quite a comfortable home. One of the things that's very apparent when we've been talking to businesses like this is that there is private equity ownership fatigue. WBB has been through the cycle several times, and I think one of the reasons why we were able to buy this business, at what we regard as a fair price, was because management were very keen to step off the private equity treadmill, which everybody assumes is a wonderful place to be. Actually, it's pretty unremitting because from the day that you're bought, you're preparing to sell. I was talking to the management team, and they asked for my opinion on this, and I said, like Warren Buffett, our preferred holding period is for life. That I think has been quite well received. We think that we've got a very strong management team there. It's going to be branded Serco WBB. It will be a business unit alongside our other ones in the U.S. business, just as MT&S has done. We hope that its management find happy and rewarding careers with us. Okay, great. Thanks, Rupert and Tom. Thank you. The next question comes from line of Christopher Bambury from Peel Hunt. Please ask your question. Good morning, gents. The SMEs are obviously crucial to this business and its profitability. I was wondering if you could elaborate a bit more on how they're recruited and how they're retained, and what kind of turnover levels you've seen in these key employees in recent years. Tom? Yeah. First of all, turnover is relatively low compared to the rest of the business. What's really good is it tends to be a pretty sticky group of people who stay with the business. To give you a little more flavor on when we say these SMEs, what we're talking about here is a highly educated, highly cleared, well-connected group. They're principally made up of a lot of retired military officers and senior defense officials who have retired. They continue to support important programs based upon relationships that they have in the industry and within the specific programs that they're part of. These are people who are very much aligned to the mission. They're there for the success of their customers. We tend to see, and I'll tell you, relative to our overall portfolio, that type of business, they tend to have a lower turnover simply because of the commitment to the mission and their ability to stay with a customer and that they are passionate about supporting. Okay. Thank you. Any more questions? Thank you. Dear participants, once again, if you wish to ask a question, please press star and one on your telephone keypad. The next question comes again from the line of Paul Sullivan from Barclays. Please ask your question. Yeah, sorry to be greedy. Can I just do a couple of follow-ups? Rupert, do you think there's opportunities to leverage this skill set internationally in any way? Just sort of following on from that, strategically and looking, thinking about Serco longer term, how does a business operating in advanced data analytics and AI sit comfortably with a U.K. business cleaning hospitals? Thank you. In terms of international leverage, I think we've got to be really careful and respectful of the secrecy implications of this. I think whilst it will increase the luster of our offering and we can develop capabilities in other parts of the world, which look to some of the things that both the MT&S business does, which we are already getting quite some advantages from in the U.S. We do have to be really careful about respecting the secrecy implications of this. As to whether a business that does AI and data analytics can sit comfortably with a business that cleans hospitals in the U.K., the answer is, I'm intensely relaxed about that. We do lots of really, it's rather like saying, how can a business that successfully operates ferries going from Aberdeen to the Orkney and Shetland Isles sit beside one that does healthcare? The answer is, we can and we do, we organize ourselves. We have this loose, tight structure. We have experts in hospital cleaning, how can we operate a business that runs prisons with one at the same time was able to stand up 10,000 people to produce call centers for tracing? We've got a management structure that allows us to do that, the combining feature is not based around technology, it's based around customers, and those are customers who are governments. Governments do a lot of different things. We do some pretty advanced things in our U.K. business. We are one of the bidders in the Athena consortium for the secure comms ground segment for the new generation satellites in the U.K. We help with the operations at RAF Fylingdales. We already do quite a lot of sophisticated stuff, not all of which we talk about a lot. It's just in the nature of the beast. Within North America, they operate very successfully the Obamacare, the CMS contract, where they're doing eligibility testing alongside a business that is doing some of the most advanced things on autonomous underwater vehicles. It's different people, different disciplines, operating in self-contained business units, but to a common management mantra. I think that we feel confident about our ability to do that. As I say, if people say what we are focused on, we're focused on serving government, in all the things that it does. I hope that answers your question. That does indeed. That's very clear. Thank you very much, Rupert. Thank you, Paul. Thank you. Dear participants, once again, if you wish to ask a question, please press star and one on your telephone keypad. Dear speakers, there are no further questions at this time. Please continue. Right. Well, thank you all very much indeed. Of course, Paul is available to take any other questions that you may have. That's Paul Checketts. Thank you for your attention and your attendance on this call. That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speakers, please stand by.