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A difficult year for Interserve

International support services and construction group, Interserve has reported on a difficult year for the Group, in its annual results for the year ended 31 December 2017.

Overall, the Group’s financial performance in 2017 was “extremely poor” as headline profit fell to £52.4 million. An inefficient operating model and excessive cost structure were to blame for leaving the organisation exposed to weaknesses in the UK performance of support services and construction in addition to a further deterioration in energy from waste during the middle of the year.

In the UK, support services according to the financial report delivered a “disappointing performance”, largely due to the impact of regulatory changes, challenging contracts mobilisations, excessive historical overheads and a cost base which Interserve says “has not been flexible enough”.

Revenue was stable at £1.7 billion, reflecting good work winning and contract retentions but, as the Group expected, its operating profit was negatively impacted by regulatory-driven costs including the National Minimum Living Wage increases, the Apprenticeship Levy, increased IAS 19 pension service charges and changes to the application of holiday pay and travelling time on our large workforce.

Profits were specifically impacted by a number of large contract mobilisations, contract performance in the justice business and some underperforming accounts which according to Interserve are “being remedied” through ‘Fit for Growth’ – the company’s three-year programme launched by the new management team in October 2017. The programme focuses on increasing the Group’s organisational efficiency, improving Group-wide procurement processes and ensuring greater standardisation and simplification across the business.

Despite the cost headwinds absorbed by the support services division in the last financial year, £2.1 billion of new work was won and the division’s future workload grew seven per cent to £6.1 billion.

Key contract wins with new and existing clients include the Ministry of Defence (£265m), Department for Work and Pensions (£227m), Network Rail (£65m), Department for Transport (£90m), and the BBC (£140m). More broadly in the commercial sector, contracts were won with power generation group RWE, travel retailer Dufry and law firm Irwin Mitchell.

Looking ahead, Interserve says 2018 will principally be characterised by its transformation plans for the business, which is especially relevant to its Support Services division as the Group looks to improve profitability.

It will be reviewing organisational design, building on the work already started in 2017, to ensure an effective and efficient operating model, as well as looking to improve governance and process to ensure a disciplined approach to work-winning and contract management. As part of Interserve’s new strategy for Support Services, it added it will also focus on select sectors and service offerings.

Debbie White, Interserve’s Chief Executive, said: 2017 was a difficult year for Interserve, but it was also a year of significant progress. As a new management team, we have stabilised the business and taken the first actions to establish a solid foundation from which we can both serve our customers effectively and underpin improved future operational and financial performance.

“This work has focused on refinancing, conducting a thorough assessment of the contract portfolio, and introducing new management disciplines, processes and cost controls under the ‘Fit for Growth’ programme. We are confident that the cost savings and management actions identified will contribute at least £40-50 million to Group operating profit by 2020, with the 2018 benefit estimated to be £15 million.

“The refinancing we recently agreed with our lenders is a major step in securing a firm financial platform to underpin the Group’s future. Of course there is much still to do. However, we are encouraged by the support from our lenders and the new facilities will allow us to execute our business plan, focus on delivering a good service for customers, drive improved operational and financial performance.”

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