The implementation of the Group’s strategy and the Fit for Growth transformation programme remain on track and the Group expects a significant operating profit improvement in 2018.
Support Services has continued to make good progress in the second half relative to both the first half and the comparable period in 2017, reflecting the cost and margin actions taken in the business as well as the mobilisation of new contracts in the first half.
UK Construction has continued to see revenue decline in the period and Interserve expects UK Construction to report a small loss in the second half. Following the combination of the International and UK construction businesses under a single leader, Interserve has completed a comprehensive review of all projects in the UK and confirms it has “adequately provided for anticipated losses”.
International Construction is still anticipated to have a stronger second half than that reported in the first half as the Group concludes several contracts.
Equipment Services had a challenging first half following the completion of major project activity in 2017. Continuing delays on major infrastructure projects in key markets persisted into the third quarter and RMDK is expected to report a percentage decline in full year profits similar to the first half 2018.
2018 is the first full year of the Group’s ‘Fit for Growth’ transformation programme, initiated by the Group’s management team following their arrival at the end of 2017. ‘Fit for Growth’ is a three-year plan to increase the Group’s organisational efficiency, improve Group-wide procurement processes and ensure greater standardisation and simplification across the business.
The Fit for Growth programme remains on track to deliver its target of £15 million savings in 2018. During the third quarter, Interserve has continued to progress the plans for the delivery of the next phase of savings to achieve the targeted £40 – £50 million of annualised savings in 2020.
Interserve continues to make progress on closing out its remaining Energy from Waste projects and the construction of all the projects is now complete. All of the plants are now operational, receiving waste, and in the final commissioning phase in readiness for handover.
As noted in the Group’s Half Year Report, risks to the programme remain and the Group encountered some additional delays in the third quarter. The Group continues to expect a net cash inflow in the second half following the receipt of certain milestone payments, although additional penalties resulting from these delays means that this inflow is expected to be less than anticipated at the time of the Group’s Half Year Report at circa £15 million.
The handover of all of its remaining Energy from Waste projects remains a core priority for the Group. Interserve continues to expect to benefit from significant further insurance proceeds arising from these projects in 2019. The receipt of further insurance income remains a key focus for the Group.
The impact of the additional cash outflows on Energy from Waste as well as an increase in receivables in certain Middle Eastern markets, has meant that Interserve now expects year-end net debt to be in the range of £625-£650 million. It anticipates that this working capital increase will unwind in 2019.
In April 2018, Interserve completed a refinancing to provide financial stability for the Group with new facilities through to 2021 to enable delivery of the Group’s business plan. Pursuant to this agreement, Interserve will announce a deleveraging plan for the Group in early 2019. The Board is working with its advisers to look at all options to deliver the optimum capital structure for the business to support its long-term, sustainable development. This process includes options to bring new capital into the business and, as previously announced, progressing the disposal of non-core businesses.
Debbie White, Chief Executive Officer, commented: “Interserve has made significant progress in 2018. Following the successful completion of the refinancing in April, the business has traded robustly in some challenging markets and continued to win significant new contracts. The ‘Fit for Growth’ programme is delivering material cost savings and a simpler and more effective business structure. Overall we remain on track to deliver a significantly improved financial performance this year in line with our plan.
“The Board remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us, particularly in closing out and exiting the Energy from Waste business. It also means reducing debt and putting a strong long-term capital structure in place. To this end we will announce a deleveraging plan for the Group early in 2019.
“Interserve has significant opportunities as a best-in-class partner to the public and private sector, and we are working with all stakeholders to put in place the right standards, services, governance and financing to deliver a stronger future for Interserve’s customers and our 74,000 people.”