Interserve Regulatory News (IRV)

News Release

28 February 2014

Strong performance and growth

Annual Results 2013 & Proposed Acquisition

Interserve, the international support services and construction group, reports strong performance and further progress with its annual results for the year ended 31 December 2013, as well as announcing the proposed acquisition of Initial Facilities for £250 million.

For further information, www.interserve.com/news

Financials

Highlights

· Maintained strong revenue growth (12.0 per cent) and operational performance: headline EPS up 5.3 per cent per cent and dividend up 4.9 per cent

· Maintained record future workload at £6.4 billion and good revenue visibility (75 per cent of 2014 consensus revenue secured)

· £2.5 billion of new business won in the year, including work with the BBC, University of Sussex, HMRC, The Royal Navy, Ministry of Defence, DWP, Magnox, Jaguar Land Rover, the Lusail Tower in Qatar and the Emirates Engine Maintenance Centre in Dubai

· Completed the transfer of £55 million of PFI assets into the pension scheme

· Proposed acquisition of Initial Facilities for a cash consideration of £250 million funded by debt and an equity placing of 9.99 per cent of issued share capital

o The combination will position Interserve as one of the largest providers (top three by turnover) of facilities management services in the UK and drive future growth

o The acquisition is expected to be significantly earnings enhancing in the first full year

Chief Executive Adrian Ringrose commented:

"2013 has been another good year for the business, and despite challenging conditions in many of our markets, we delivered substantial growth in both revenue and headline profit, and made important strategic progress. Our focus on delivering the best possible service to our clients has resulted in strong work-winning in the year, from both new and existing customers, maintaining our record future workload at £6.4 billion.

"In our UK Support Services business we delivered our medium term objective of finishing the year with margins of five per cent. Our Construction division remained resilient and Equipment Services delivered strong results, while continuing to expand into new markets.

"We also completed a number of important acquisitions, further extending our capabilities in key areas for growth, both in the UK and the Middle East.

"We have confidence in the continued growth potential of the business, which is reflected by our proposed acquisition of Initial Facilities. The acquisition of such a complementary business allows us to deliver further against our growth strategy."

- Ends -

For further information please contact:

Robin O'Kelly, Group Director of Communications 07786 702 526

Richard Campbell/Ian Brown, Capital MSL 0203 219 8800

About Interserve

Interserve's vision is to redefine the future for people and places. We are one of the world's foremost support services and construction companies, operating in the public and private sectors in the UK and internationally. We offer advice, design, construction, equipment, facilities management and front-line public services. Interserve is based in the UK and is listed in the FTSE 250 index. We have gross revenue of £2.6 billion and a workforce of over 50,000 people worldwide. www.interserve.com.

STRATEGIC REPORT - Chairman's Statement

Strategic Development

2013 was an important year for Interserve in which we made both significant strategic as well as operational progress. At the beginning of the year we further strengthened our balance sheet by crystallising value from our PFI portfolio. We used this strength to complete a number of acquisitions that increase our exposure to growth markets, to reduce further our pension deficit and to position the Group with the necessary resources to continue its growth. Our strategy remains focused on developing the strength of our three main business streams, while also finding additional growth opportunities where we can gain competitive advantage by applying the core skills from these businesses in adjacent markets and geographies.

Operationally, despite mixed market conditions, the business performed strongly, delivering profitable growth while continuing to invest in the efficiency and scale of our existing businesses. Interserve now operates in over 40 countries around the world and, whilst not uniform in pace, the overall global economic outlook has started to improve. Our business is now well positioned and resourced to take full advantage of the opportunities this will create.

During 2013 the Group expanded its operational footprint through targeted acquisitions as well as new ventures. In the Middle East we continued to grow our capability in the oil and gas services sector, adding both TOCO in Oman and Adyard in the United Arab Emirates (UAE) to complement our capabilities in Qatar with Madina and create a pan-regional presence. In the UK we have deployed our project finance skills into selective commercial development opportunities such as the redevelopment of Edinburgh's Haymarket. We also added to our construction portfolio through the acquisition of Paragon, a London-based fit-out business, thereby expanding our capability and increasing our presence in the key London market.

Divisional Overview

Our UK Support Services business has continued to grow organically, mobilising new, innovative projects and continuing to win new business with organisations such as the BBC and the University of Sussex. We have been adept at designing and implementing innovative solutions which support both our public and private sector clients in meeting their objectives of controlling costs whilst delivering better value services. We continue to pursue opportunities in a number of front line services in the UK, ever mindful of the reputational risks as well as the commercial potential as we assess the risks and merits of more sensitive areas of Government outsourcing.

Our construction businesses, in both the UK and the Middle East, have performed well, showing continued resilience in the face of difficult economic conditions. We increased our future workload in these segments through new business with clients such as Jaguar Land Rover in the UK, Meraas, (UAE) Dubai's Majid Al Futtaim Group (Mall of the Emirates), and remain well-placed to grow as market conditions turn for the better.

In Equipment Services we have continued to manage our global fleet to respond to market opportunities and have expanded into new markets in the Far East, Africa and Latin America.

Health and Safety

Whilst we continue to win recognition from organisations like RoSPA for the high standards we hold in health and safety, and have made further and continued progress in reducing our overall accident rate, 2013 has also been a difficult year. We had three separate incidents involving fatalities in our Middle East operations and our thoughts remain with all those affected by these tragic events.

Such events serve as a salutary reminder that we must continue to strive to minimise the risk of accidents. Health and safety has always been the most important of priorities for the Group and we will maintain this focus with renewed intensity in 2014.

Sustainability and Integrated Reporting

Our 2013 Annual Report is different from previous reports in that it reflects a more integrated approach to the communication of our strategy, reporting our performance in a broader sense than has previously been the case and placing sustainability increasingly at the heart of what we do. During the year we launched a far-reaching sustainability plan, SustainAbilities. This, and our future reports will increasingly focus not just on the impact the business has on financial capital, but also on other 'capitals' - knowledge, social and environmental - that together deliver sustainable performance and profitability.

These impacts take many forms, for example providing learning opportunities for our 2,000 new employees in Leicestershire through an innovative partnership with Leicester College, or by ensuring over 95 per cent of our supply chain spend on a major new divisional headquarters for West Yorkshire Police goes to small and local enterprises. In a recent Cabinet Office study of Government Suppliers, Interserve topped the list with over 70 per cent of our supply chain spend going to SMEs when delivering work for central government.

For many years Interserve has recognised the importance of a sustainable corporate strategy, but this new plan provides a formal framework on which to build further. We have set ourselves clear targets and objectives across the breadth of the SustainAbilities plan and will report our progress accordingly. The idea of business providing a social and environmental benefit, as well as economic and financial, is not a new one, but it has never been more relevant than it is today, with the values and integrity of corporate organisations increasingly in the spotlight.

For a company like ours, for which public service is at its core, I firmly believe that we can and should play a leading role in demonstrating our social, environmental and economic value and I hope that is reflected in this Annual Report.

Our People

On behalf of the Board, I thank all of our people for another year of hard work and dedication. Our people collectively and individually exemplify the ingenuity that embodies the Interserve brand to our customers and make us what we are today, a strong and growing company.

Board Changes

Following the retirements of David Paterson and David Trapnell from the Board, Les Cullen became Senior Independent Director and we welcomed Anne Fahy, as a non-executive director and chair of the Audit Committee.

Prospects

The Group continues to focus on growth, whether organic or acquired, and now with markets showing signs of broad improvement we are confident of delivering further growth in 2014. On 28 February 2014, we announced the proposed acquisition and associated financing of Initial Facilities for £250 million. The acquisition is conditional upon shareholder approval and we will be holding a General Meeting for shareholders to vote on the proposal on 17 March 2014. The Board believes this acquisition will further strengthen the ability of the Group to take advantage of future market opportunities.

Dividend

We continue to deliver on our growth strategy and are confident in the medium term outlook for our business. We are therefore recommending an increased final dividend of 14.7p (2012: 14.1p), bringing the total dividend for the year to 21.5p (2012: 20.5p), an increase of 5 per cent. The final dividend will be paid on 21 May 2014 to shareholders on the register at the close of business on 4 April 2014.

Lord Blackwell

Chairman

28 February 2014

STRATEGIC REPORT - Operational review

Interserve serves the needs of its broad client-base through many different combinations of services and via a range of organisational structures. Our success is founded on the skills and ingenuity of our people who win repeat business by developing lasting, long-term relationships. Our team, which now stands at more than 50,000, thrives through its ability to retain and attract the right people and through investing in skills development and training.

We segment our results into four main areas of service - Support Services, Construction, Equipment Services and Investments - all of which are supported by central Group Services.

Support Services

Support Services focuses on the management and delivery of operational services to both public and private sector clients in the UK and internationally.

* Operating margin is calculated based on the underlying operating margin of associates and the reported operating margin of subsidiaries.

We performed well in 2013, growing revenue by 12.9 per cent to £1.3 billion and operating profit by 25.2 per cent to £60.1 million as margins strengthened further in the UK to 4.7 per cent (2012: 4.0%).

We see a continuing trend for outsourcing and aim to be a trusted partner for a broadening range of services on behalf of our clients. We are expanding our reach in front-line services such as justice, community healthcare and rehabilitation and broadening our offering to oil and gas markets in the Middle East.

Our success is founded on our ability to design and deliver improved value from operational services, building long-term relationships with clients and drawing on our experience across the breadth of our service mixand sector experience to win new business.

UK

Our work-winning remained strong and we achieved a number of notable successes that reflect the diversity of capabilities of the division including: Dixons, University of Sussex, BBC, Ministry of Justice (MoJ), Ministry of Defence (MoD), Nottingham University NHS Trust, London Borough of Southwark, London Borough of Lambeth, the Home Office, the Department of Work and Pensions (DWP), Magnox and Meggit.

A significant success for us in the period was winning a five-year, £150 million facilities management contract with the BBC. The contract (which is extendable to nine years' duration) involves the management and delivery of services at over 150 locations across the UK including New Broadcasting House in London and MediaCityUK in Salford. We will be responsible for services ranging from critical broadcast engineering and business continuity services, through to implementing a new and dynamic workplace support model.

In partnership with ESS Support Services Worldwide, we are now providing back-office and facilities management services at five Royal Navy establishments in the south west. The three-year deal, valued at more than £15 million, is part of the Fleet Outsourced Activities Project.  Our role involves managing stores and logistics, motor transport and administrative support in areas such as HR, payroll and travel. Elsewhere in the Defence sector we mobilised our services in Gibraltar as part of our 'Four Islands' infrastructure support activities for the MoD.

As well as targeting new contracts, expanding and developing our existing client relationships is an important element of our growth strategy. Our relationship with the Home Office (providing support for the National Offender Management Service, the National Probation Service, UK Border Agency and the College of Policing) was extended for a further two years, reflecting the partnership that we have forged since we started delivering services in 2008. We also extended our contract with the Foreign and Commonwealth Office to provide support services to 10 British embassies and consulates across Spain.

In August, our joint-venture Landmarc Support Services was awarded a contract extension by the MoD worth circa. £110 million. Landmarc will continue until at least July 2014 to manage military training facilities across the MoD's 500,000 acres of built and rural UK training estate, a position it has held since 2003.

A key aspect of our growth strategy is to add new capabilities to our offering. During the year we made significant progress in this regard in the healthcare sector where we see long-term demographic trends and changing needs of patients and commissioners that are likely to result in more outsourced services. By both growing our existing business and expanding into new areas such as healthcare services to people in their homes, we believe we are well-placed to service this growing need.

Advantage Healthcare (acquired in December 2012) extends our service range into community healthcare services including: case management, social care, clinical and nursing services for Clinical Commissioning Groups, local authorities, and through private referrals.

Our innovative approach to finding affordable, yet high quality solutions for our healthcare partners is demonstrated by The Cotton Rooms, a hotel for patients receiving treatment at the nearby University College London Hospital.

Both Advantage Healthcare and The Cotton Rooms provide quality care and services outside of a traditional hospital setting, providing improved patient pathways and benefitting the health economy through lower costs than in 'traditional' care solutions.

The changing needs of the UK population and economy, together with reform into how front-line public services are commissioned, have created other growth opportunities. Since 2011, Interserve has played its part in the extension of outsourced services that directly engage with the citizen, such as the Work Programme, a flagship policy under Welfare Reform and aimed at supporting the long-term unemployed into sustainable employment. Operating in multiple UK regions, through personalised support, training and intervention, Interserve has now supported its customers into some 34,000 employment opportunities for people who had been out of work for more than a year.

Similarly, our justice team is competing for significant opportunities in offender rehabilitation services, on which we expect to see further developments during 2014.

As a major employer, we take our social and environmental responsibilities very seriously and, as our SustainAbilities plan demonstrates, we aim to make a positive difference to the communities we serve. Landmarc has been a standard bearer for the Group with its work on social value setting up business hubs for small, rural businesses and promoting local business enterprise through the Landmarc 100 initiative.  

We also seek to create opportunities for our people, especially in supporting their ongoing learning and development. This is well-exemplified in Leicester (where we manage a comprehensive facilities and estates contract on behalf of the NHS) in support of which we have forged a partnership with Leicester College to provide opportunities for our 2,000 staff to gain a range of occupational and educational qualifications in parallel with their employment.

International

International Support Services is primarily focused on the oil and gas sector, providing fabrication, maintenance, turnaround services and training in the Middle East.

The business has been centred on Qatar for a number of years but we have recently expanded our footprint to include the United Arab Emirates (UAE) and Oman. In addition to our oil and gas activities, we also provide facilities management services across a broad range of markets, such as hospitality, leisure, education, defence and retail.

A mix of subdued market activity, competitive pressure and the accelerated re-tendering of a significant contract at Ras Laffan (Qatar) impacted the performance of our principal business, Madina, relative to earlier more buoyant periods. Latterly, new contract wins, together with ongoing cost-management focus, should benefit future periods. Overall, performance in this segment was boosted through the acquisitions of two new businesses, resulting in an increase in operating profit of 10.8 per cent to £4.1 million (FY 2012: £3.7 million), albeit within this result, volumes in our Omani business, TOCO, were similarly temporarily affected by deferred client expenditure at Mukhaizner.

In January 2013 we expanded our oil and gas services activity by acquiring TOCO, an Omani business specialising in fabrication, maintenance, repair and logistics services for the on-shore oil sector. In September we completed the acquisition of Topaz Oil and Gas (now renamed Adyard), based in Abu Dhabi and Fujairah, which provides project management and maintenance for off-shore activities and marine rig maintenance. These acquisitions provide us with greater reach and capability across the Gulf region, opening up access to a wider pool of potential customers and pan-regional, as well as national opportunities.

We are making good progress with the integration of these businesses, and although there have been some delays and deferrals to the services we are providing, pushing some work out to 2014, this should not have a negative impact in the medium term. Indeed, shortly before year-end, Adyard was awarded a $17.0 million (circa. £10.8 million) contract for the fabrication of an offshore platform for the Zora Field Development Project on behalf of Dana Gas.

Our other facilities management activities in the Middle East have made further progress in the year and, although the market is relatively immature compared to the UK, there is significant potential to export our skills further. Examples of new facilities management contracts secured in the period include that with Habib Bank in Dubai (a longstanding customer of our construction business) and for estate management services at the Monte Carlo Beach Club in Abu Dhabi.

Outlook

In the UK we expect Support Services to continue its strong progress and to maintain margin levels as we win new work and extend relationships with existing clients. Of particular focus in 2014 will be the procurement of services for the UK's Defence Infrastructure Organisation (DIO), where we are incumbent on two of the six contracts on which we are currently bidding. In addition, we are adding new competences and capabilities as we expand both our front-line services directed at the citizen, as well as our service offer to the private sector market, building on successful contract wins such as the BBC.

Internationally, we expect to see further revenue growth as we look to exploit the opportunities of our expanded presence and broader offering.

Construction

We offer design, consultancy and construction services to create whole-life, sustainable solutions for building and infrastructure projects. Our focus is on forming long-term relationships and delivering repeat business through commercial structures such as framework agreements and project-financed schemes.

Our presence in the Middle East is structured through longstanding joint venture partnerships, enabling us to form long-term relationships and extend activities with existing clients.

* Operating margin is calculated based on the underlying operating margin of associates.

UK

UK Construction again performed well, showing continued resilience amid challenging market conditions.

Against a backdrop of subdued major infrastructure activity, our strategy of nurturing repeat business on key accounts and selectively diversifying into new sectors yielded increased revenue, up by 8.8 per cent to £802.2 million, with operating profit 0.6% ahead of 2012 at £14.7 million. Margins remained within our expected range at 1.8 per cent. Future workload remained broadly stable at £1.0 billion (FY2012: £0.9 billion), benefitting from our successful targeting of a mixture of new and existing frameworks, and from selective opportunities in the private sector.

One example of our diversification is in the construction of Energy from Waste (EfW) plants in the UK. Our £146 million scheme in Glasgow, on behalf of Viridor, is now underway and in February we announced a joint-venture with Babcock & Wilcox Vølund A/S to design and build an EfW plant for Viridor in Peterborough, UK, with a contract value of £15 million.

In May we acquired Paragon, a specialist fit-out and refurbishment business based in London, significantly extending our capabilities in that market. The business continues to thrive and is benefitting from integration into the Group by gaining access to larger scale projects such as with HM Courts and Tribunal Service, as part of a national framework.

Our ability to grow through structuring innovative investment models is illustrated by the redevelopment of the Haymarket area of Edinburgh. As part of the scheme we have invested an initial £10.6 million of equity and subsequently undertake circa. £150 million of construction work to develop the mixed-use site. We will look to exploit further opportunities to combine our construction and project-financing skills during 2014 and beyond.

Much of our work for the public sector is channelled through framework agreements, which provide a strong foundation and good visibility for our UK construction business.

During the year we continued to undertake various projects on NHS frameworks, including completions at Frome Medical Centre, Kettering General Hospital, Langdon Hospital in Dawlish, with new awards including Mid Cheshire Hospitals NHS Foundation Trust and Dda Health Board in Wales.

In education, we redeveloped the Charter Academy in Portsmouth under the National Academies Framework and were confirmed as selected contractor in the Priority School Building Programme to deliver eight schools in the West Midlands region. We also completed a University Technical College next to the famous Silverstone race circuit which specialises in a high performance engineering syllabus.

In December we were awarded a place on the £250 million Defence Infrastructure Organisation (DIO) framework for the East Midlands and Eastern England region. The four year framework covers an area spanning Lincolnshire to Essex, with an option for the DIO to extend by a further three years. The Regional Framework will be used to deliver a programme of projects each valued at up to £12 million.

Our relationship with Jaguar Land Rover (JLR) has grown over the course of the year. In April we announced the start of the first phase of works at JLR's new Engine Manufacturing Centre near Wolverhampton, with further phases also underway to extend the engine plant in the West Midlands. This was supplemented by two subsequent contract awards at other Jaguar Land Rover sites and will provide work through to late 2014.

Part of our success in growing this relationship has been through the use of innovative technologies such as BIM (Building Information Modelling) which we have used as part of the consultation and co-ordination process with JLR, providing an unprecedented level of detail at the design stage. Our use of BIM has helped to create real-world models for procurement, prefabrication, coordination, manufacturing and installation.

Sustainability is high on our agenda and is becoming a powerful differentiator with a growing number of clients. Renewable technology is incorporated into schemes more and more often, including the use of photovoltaics, solar collectors and grey water recycling. As part of our design development we regularly provide feasibility reports and business cases to help clients' consideration of sustainable options and, selectively, we are able to provide solutions through financing secured against long-term energy savings.

Our added value as a main contractor is to provide coordination of the many trades, skills and suppliers involved in delivering construction projects. As such, small and medium-sized enterprises (SMEs) have long been important and valued members of our supply chain. In August, the Cabinet Office published details of the UK Government's main construction contractors spend with SMEs across central government projects. We are pleased that Interserve topped the list of companies, channelling 70 per cent of our supply chain spend to SMEs, when delivering work for central government clients.

We also actively focus spend on suppliers that are local to our projects, thereby reducing unnecessary environmental impact and stimulating economic activity within the local community. In our development agreement with West Yorkshire Police Authority, 95 per cent of sub-contracts are awarded to local companies.

International

Construction in the Middle East performed broadly in-line with expectations and generated satisfactory results in relatively weak market conditions which have experienced increased levels of competition and consequently lowered margins.

Against this backdrop we have continued to manage our cost base actively, whilst seeking to maintain our capabilities in key sectors. We remain optimistic that the Middle East offers good medium-term potential - a view that, despite variances in regional market conditions is evidenced by a slight increase in work winning in the year and by the positive early-cycle activity witnessed by our Equipment Services businesses in the region.

Our experience in the Middle East, built up over decades of strong local partnerships, continues to stand us in good stead. One such example is the contract awarded to Khansaheb valued at AED 636 million (circa. £110 million) for the redevelopment, expansion and upgrading of the Mall of the Emirates in the UAE, on behalf of long-standing client, Majid Al Futtaim.

More generally, market conditions in the UAE have begun to exhibit signs of improvement as we secured work for the Office of HM Crown Prince of Dubai (leisure), EMAAR Boulevard (restaurants), Chalhoub Group (retail), Government of Fujairah (roads) and Dubai Festival City (retail) in the period. In addition, we were awarded a contract from General Electric International to construct the new GE Emirates Engine Maintenance Centre in Dubai, and won contracts to carry-out extensive fit-out works to the Four Seasons Hotel, along with road and infrastructure work for Meraas.

In Qatar, where market conditions remained more subdued, we were awarded a contract for the construction of the 26-floor Lusail Tower and for civil engineering in connection with a new desalination plant at the Ras Abu Fontas power and water station.  We were commissioned by Siemens to provide civil and building works in the energy sector and, in joint venture with Arabtec Construction, by Doha Festival City for site enabling, which we hope may lead to further awards on this major new development scheme.

In Oman, work was completed for Daewoo Engineering and Construction on the Sur Independent Power Project, including civil engineering works on the largest seawater intake structure in the Sultanate. Further work was secured with a range of clients including HSBC, The Wave Muscat and Petroleum Development Oman.

Although this region may, at first glance, not appear to be the most fertile for our SustainAbilities Plan, we are at the forefront of thinking, bringing our perspectives to markets increasingly appreciating the importance of these issues. Already we have had a number of notable successes, including reducing the carbon emissions of our Qatar business by 30 per cent, and rolling out a range of solar powered, water and waste-neutral ambulance facilities in Dubai.

During the year we also exited our business in India, where recent results and future potential did not meet our expectations. A financial charge of £5.1 million is included in exceptional items in our 2013 accounts.

Outlook

We believe we are well-placed to take advantage of market improvements that may begin to emerge in the UK during 2014.

We are seeing early signs of a nascent recovery in the UAE and Qatar, while our prospects in the region have also been boosted by a proactive move to broaden our accessible markets and extend our capabilities through partnerships, such as our joint venture with Arabtec in Qatar.

We are also looking to augment revenue growth by bringing our project finance competences to bear in respect of key international markets.

Equipment Services

Our Equipment Services business delivers bespoke engineering solutions and provides temporary structural equipment (formwork and falsework) for complex infrastructure and building projects.

The division performed strongly, increasing profit by 25.6 per cent to £20.1 million (FY 2012: £16.0 million) with operating margins gaining 230 basis points as this operationally-geared business benefitted from increased activity in global infrastructure markets.

In anticipation of improved market conditions we increased our net capital expenditure by 65% to £10.4 million, to facilitate growth. We expect this trend to continue during 2014.

We continued to expand into new territories such as Singapore, Colombia and Kurdistan and grew our presence in a number of existing markets such as Chile, Panama, South Africa and the USA. Alongside these expansions, we have continued to remain flexible and agile, downsizing in weaker markets, relocating our fleet to exploit opportunities in stronger markets and keeping our cost base responsive to demand fluctuations.

Middle East and Africa

We continued to perform well in the region, benefiting from strong work-winning and increased demand in the Kingdom of Saudi Arabia, where we designed and supplied in excess of 15,000 tonnes of equipment to Roots Group Arabia for the expansion of the Grand Haram Mosque in Makkah. The 250,000 square metres of ornate prayer halls, ceremonial halls and courtyards is the largest project RMD Kwikform has undertaken in the region to date.

In Oman, we supplied equipment for the construction of a state-of-the-art college for the technical education of armed forces in Muscat and for the new Salalah International Airport, which includes the construction of a Passenger Terminal Building, an Air Traffic Control Tower, ancillary buildings, roads and bridges.

Following restructuring in 2012, our performance in South Africa improved significantly as we opened new branches and gained market share.

Australasia and the Far East

As anticipated, demand weakened somewhat in Australia, reflecting more subdued economic conditions and the reining back of a number of large natural resources projects. Elsewhere in the Asia-Pacific region demand grew, providing some mitigation for this region overall.

Notable projects in the region included the application of our Airodek system in a $50 million redevelopment programme for the Channel Court shopping complex in Hobart, Tasmania, where the operational efficiencies of our rapid erection/dismantling system helped accelerate the project against a challenging programme.

Growth in Hong Kong was largely driven by increased Government infrastructure spending on major transport projects in which we designed and supplied specialist shoring equipment for the widening of the Tolo Highway connecting the towns of Sha Tin and Tai Po. We are also providing equipment on significant projects to connect a new underground railway to the multi-level West Kowloon Terminus.

Europe

In the UK, the business performed well, despite a fragile overall construction market. Much of our success in the UK is attributable to providing a major formwork and falsework solution for a casino, hotel and cinema complex being built near Birmingham.

The market remained slow across much of mainland Europe. We undertook further cost reduction in our operations in Ireland and Spain to manage our cost base but also sought to develop export opportunities, in particular to other Spanish-speaking markets, such as Panama and Colombia.

Americas

We operate in the USA and some Central South American markets. The US construction market began to exhibit signs of growth in the period which, combined with the benefits from restructuring undertaken in 2012, generated a much improved performance. Towards the end of the year we extended our West Coast operations, centred around San Francisco and Los Angeles.

In Chile, where we now have three operational locations, we supplied a large scale formwork and shoring project to create walls and slabs for the new USD $65 million hydro-electric Laja power station.

Across the Equipment Services business, our SustainAbilities programme includes a focus on procurement, environmental and ethical aspects to supplier audits, helping suppliers improve emissions performance through manufacturing improvements and involvement in the 'Surplus Network', which recycles construction waste.

Outlook

We anticipate further improvement in Equipment Services' performance as the business continues to focus on margin improvement and benefits from global economic trends. To support this growth, we plan to continue increasing investment in our fleet of equipment and to implement further territorial expansion.

Investments

The Investments division is responsible for leading the Group's project-investment activities and managing equity investments both in Public Private Partnership (PPP) projects and with selective private sector projects.

Results in respect of PFI activities are summarised below.

Highlights of 2013 included completion of the transfer of further PFI assets into the Interserve Pension Scheme, thereby reducing the Group's pension deficit and resulting in an exceptional profit of £3.6 million in the period.

Financial close was achieved on the Alder Hey Children's NHS Foundation Trust project, and Phase One of the Help for Heroes accommodation on the Armada PFI contract in Plymouth was completed and successfully integrated into our existing contract. Facilities at the St Helens Building Schools for the Future project became fully operational during the period.

Group Services

All central costs, including those related to our financing and central bidding activities, are disclosed within the Group Services segment.

Group Services' costs in 2013 were £22.1 million (FY 2012: £21.1 million), accommodating an increased investment in back office capabilities, such as IT, people development and communications. We also continue to invest in skills development and training to support and enable our continued growth. In addition, we have rolled-out an ongoing, company-wide campaign to communicate Interserve's vision and values, reinforcing our shared corporate culture.

We anticipate this level of investment will continue in the medium term, as we ensure that the quality, professionalism and scale of our support functions keep pace with the growth of our operational businesses.

Outlook

Whilst individual circumstances remain mixed, in aggregate, market conditions are now beginning to show signs of improvement. Against this backdrop and through our strategic plans, we expect to deliver further progress in 2014, with revenue and profit growth together with the successful integration of a number of acquisitions off-setting slightly weaker near-term performance in International Construction.

We remain confident in our medium-term outlook, based on strong long-term growth drivers and our attractive positioning in our core markets and our ability to identify and deliver on exciting project and corporate opportunities.

- END -

PRINCIPAL RISKS AND UNCERTAINTIES

We operate in a business environment in which a number of risks and uncertainties exist. While it is not possible to eliminate these completely, the established risk-management and internal control procedures, which are regularly reviewed by the Group Risk Committee on behalf of the Board, are designed to manage their effects and thus contribute to the creation of value for the Group's shareholders as we pursue our business objectives.

The Group continues to be dependent on effective maintenance of its systems and controls. Over and above that, the principal risks and uncertainties which the Group addresses through its risk-management measures are detailed below.

The Group continues to have no material exposure to currency risks or volatility in commodity prices. The Group's principal businesses operate in countries which we regard as politically stable.

FINANCIAL REVIEW

Summary

Financial highlights of 2013 included:

· Increase in Headline Earnings Per Share of 5 per cent

· A strong trading performance in line with expectations, based on:

· Further improvement in Support Services UK margins with achievement of the 5 per cent margin target within H2 2013

· Good revenue growth in UK Construction with margins in line with expectations

· Further margin enhancement in Equipment Services

· Modest operating cash outflow in the year, with net investment in capex and working capital

· Investment of £49 million in acquisitions, expanding our oil and gas maintenance provision in the Middle East (TOCO & Adyard) and strengthening our offering in the UK interior fit out business (Paragon)

· Completion of the PFI disposal process begun in 2012 with £55 million of PFI assets transferred to the Interserve Pension Scheme in January 2013

Financial performance

Revenue and operating profit

Consolidated revenues increased by 12 per cent compared with 2012, and total gross revenues (including our share of joint ventures and associates) by 9 per cent.

UK Support Services (assisted by the full year impact of Interserve Working Futures, acquired in 2012) delivered a strong performance with a 7 per cent increase in revenues. With the acquisitions of TOCO & Adyard the International Support Services division revenues increased to £101 million. Despite continuing tight markets UK Construction grew revenues by 9 per cent, of which 4 per cent was attributable to Paragon, acquired in the year. International Construction revenues grew by 7 per cent although margins remained under pressure. Equipment Services delivered a broadly flat revenue performance with growth of 1 per cent.

Full-year operating margin of 3.4 per cent (2012: 3.3 per cent) again reflects a stronger second half than first half with an operating margin of 3.5 per cent (H1 2013: 3.2 per cent). Support Services UK achieved its 5 per cent margin target in the second half of the year with a return of 5.1 per cent, this helped lift the overall year result from 4.0 per cent in 2012 to 4.7 per cent in 2013. International Support Services margin of 4.4 per cent (2012: 12.8 per cent) reflects the changing shape of the division following the acquisitions of TOCO & Adyard. UK Construction margins were in line with our expectations at 1.8 per cent (2012: 2.0 per cent) and have reverted to near long-term norms. Margins in our International Construction operations remain under pressure, declining from 6.5 per cent to 5.1 per cent. Market conditions are mixed with the UAE beginning to show signs of recovery but Qatar remaining difficult. We remain confident in the medium term potential of our chosen markets. Equipment Services delivered a strong performance with full year margins of 11.9 per cent (2012: 9.6 per cent). We continue to see half on half improvements in this division with H2 2013 margins at 13.5 per cent (H2 2012: 10.7 per cent). We expect a further recovery towards medium term margin expectations of 15 per cent over the coming year.

Average and closing exchange rates used in the preparation of these results were:

Movements in exchange rates during the year had no material impact on the results of the Group.

Investment revenue and finance costs

The net interest charge for the year of £5.6 million can be analysed as follows:

Despite an increase in year end net debt a lower average net debt during 2013 helped to drive a reduction in the net interest charge.

Interest receivable on sub-debt decreased to £0.6 million (2012: £5.4 million) reflecting the disposal of the majority of PFI assets in 2012 and January 2013.

Under IAS19R the same rate is now used to calculate the return on scheme assets and the discount rate on scheme liabilities. The net impact of these two pension-related items was a (non-cash) net interest cost of £1.4 million in 2013 (2012: £1.9 million cost).

Taxation

The tax charge for the year of £13.1 million represents an effective rate of 19.2 per cent per cent on total Group profit before taxation. The factors underlying this effective rate are shown in the table below:

* The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.

As anticipated last year, the underlying tax charge and rate is slightly lower than in the previous year, reflecting both the fall in UK Corporation tax and continuing management action to stem losses in overseas tax jurisdictions that are not available for relief against other Group profits.

Profit before tax of £68.1 million (2012: £179.8 million) is lower than the previous year, due principally to the inclusion in 2012 of £114.9 million of gains on the disposal of PFI investments.

Dividend

The directors recommend a final dividend for the year of 14.7 pence, to bring the total for the year to 21.5 pence, an increase of 4.9 per cent over last year. This dividend is covered 2.2 times by headline earnings per share.

Net debt and cash flow

Average net debt for the year was £15 million (2012: £27 million). At the year end, we had net debt of £38.6 million (net cash 2012: £25.8 million), reflecting our continuing investments in acquisitions (2013: £49.1 million) and net capital expenditure (2013: £33.7 million).

The operating cash flow of £39.8 million (2012: £53.6 million) reflects the increased level of capital expenditure and an increase in working capital levels, both of which were anticipated at the start of the year. Our rolling 3 year gross operating cash conversion is 89.5 per cent (2012 : 105.6 per cent)

The net working capital outflow of £19.7 million (2012: £0.2 million inflow) reflects a partial reversal of previous years' trends, due both to the growth of the business, and to continued pressures on payment terms. The aggregate working capital movement over the past 3 years is an outflow of £10.0 million, during which time consolidated revenue has increased by 19 per cent.

Net capital expenditure increased significantly to £33.7 million (2012: £14.9 million) and was in excess of the depreciation charge for the first time for a number of years. This reflects continuing investment in the Equipment Services fleet, further investment in our back office and client facing assets in UK Support Services and refreshing of the plant and fleet of our newly acquired businesses.

Despite tight trading conditions in the Middle East our remitted dividends of £13.7 million remained stable as a percentage of profits earned.

Tax paid of £5.7 million (2012: £10.7 million) remains lower than the Consolidated Income Statement charge incurred by the Group, principally driven by tax deductions for pension deficit payments and timing differences.

Investments outflow in the year of £10.6 million (2012: £11.6 million) reflects our 2013 equity investment in the Edinburgh Haymarket development scheme; the prior year balance reflects Group PFI investments.

Acquisitions outflow of £49.1 million in 2013 represents the net cash payable for the acquisitions of TOCO, Paragon and Adyard.

Disposals / PFI

The majority of PFI assets were disposed of during 2012. A final tranche of 19 assets was transferred to the Pension Scheme at a valuation of £55 million on 7January 2013. This transaction generated a profit on disposal of £3.6 million which is treated as an exceptional item within the 2013 results.

Acquisitions

We continued the process of reinvesting the proceeds raised from the PFI disposals by completing three acquisitions, for consideration of £52.4 million, during the year.

On 7 January 2013, jointly with our partner in Oman, we acquired the oil and gas maintenance business of Willbros Middle East (known as TOCO). The acquisition expands our operational footprint in the oil and gas services business into Oman, a key growth market. Total cash consideration was £25.7 million, of which we contributed 85 per cent. The review of fair values identified acquired net assets of £10.0 million including £4.9 million of acquired intangible assets representing customer relationships. These acquired assets will be amortised over periods up to five years. The balance of £11.8 million has been recognised as goodwill.

On 23 May 2013 we acquired Paragon Management UK Limited, a specialist interiors and property refurbishment business. The acquisition boosts our interiors fit out offering in the UK. Total cash consideration was £3.0 million. The review of fair values identified acquired net assets of £2.6 million including £0.4 million of acquired intangible assets representing customer relationships. These acquired assets will be amortised over periods up to five years. The balance of £0.4 million has been recognised as goodwill.

On 17 September 2013 we acquired the oil and gas maintenance business of Topaz Oil and Gas Limited (now known as Adyard). The acquisition gives us an operational footprint in the oil and gas services business within the UAE and, in combination with the acquisition of TOCO, continues our strategy of building a regional capability. Total cash consideration was £27.6 million. The review of fair values identified acquired net assets of £17.7 million including £4.4 million of acquired intangible assets representing customer relationships. These acquired assets will be amortised over periods up to five years. The balance of £9.9 million has been recognised as goodwill.

We maintain a selective approach to reviewing potential acquisition opportunities, seeking out strategically attractive assets in growth markets. With our expanded debt capacity and facilities, we remain able to take advantage of further appropriate acquisition opportunities as they are identified.

Pensions

At 31 December 2013 the Group pension deficit under IAS 19, net of deferred tax, has significantly decreased to £5.9 million (2012: £77.8 million):

The Scheme assets increased by £121.0 million during the year after allowing for benefits paid, benefiting both from a strong performance on the investment portfolio and the additional contribution of £55.0 million of PFI assets to the scheme on 7 January 2013.

Defined benefit liabilities and funding

The Group's principal pension scheme is the Interserve Pension Scheme, comprising approximately 92 per cent of the total defined benefit obligations of the Group.

The triennial actuarial valuation of the Scheme as at 31 December 2011 was completed during 2012 with an assessed actuarial deficit of £150 million. Following the £55 million contribution of PFI assets (which completed in January 2013) the annual recovery payments now stand at £12 million per annum, indexed each year, until 2019. The reduction in these cash contribution levels, from the previous £23 million per annum; makes an additional£11 million of cash flow per annum available for reinvestment.

Investment risks

Scheme assets are invested in a mixed portfolio that consists of a balance of performance-seeking assets (such as equities) and lower-risk assets (such as gilts and corporate bonds). As at 31 December 2013, 49 per cent of the Scheme assets were invested in performance-seeking assets (2012: 45 per cent).

The agreed investment objectives of the Scheme are:

· to secure, with a high degree of certainty, liabilities in respect of all defined benefit members; and

· to adopt a long-term strategy which aims to capture outperformance from equities and move gradually into bonds to reflect the increasing maturity of the defined benefit membership with a view to reducing the volatility of investment returns

The majority of equities held by the Scheme are in international blue chip entities. The aim is to hold a globally diversified portfolio of equities, with an ultimate target of 50 per cent of equities being held in UK and 50 per cent in US, European and Asia Pacific equities.

Having focused in recent years on investment strategy and on injecting PFI assets and additional cash contributions into the Scheme to address the funding deficit, our future focus is more likely to be on liability management. In particular, we intend to assess the viability of insuring some of our liabilities in order to reduce the level of volatility in the Scheme.

IAS 19 assumptions and sensitivities

Assumptions adopted in assessment of the income statement charge and funding position under IAS 19 are reviewed by our actuarial advisers, Lane Clark & Peacock LLP.

The principal sensitivities to the assumptions made with regard to the balance sheet deficit are as follows:

1 Life expectancy of a current pensioner aged 65.

2 Life expectancy at age 65 for an employee currently aged 45.

The Group has applied the new accounting standard, IAS19R ("Employee Benefits") from 1 January 2013. As a result comparative numbers for 2012 and earlier years have been restated to a consistent basis. Scheme administration expenses are now expensed within operating profit (they were previously included in the return on scheme assets disclosed within interest) and the expected return on scheme assets is now accounted for at the lower liability discount rate (equivalent to a AA corporate bond yield). The combined impact of this restatement on 2012 was a reduction in the published Headline EPS of 1.9 pence. There was no impact on the disclosed obligation, asset, balance sheet or cash flow.

Treasury risk management

We operate a centralised Treasury function whose primary role is to manage interest rate, liquidity and foreign exchange risks. The Treasury function is not a profit centre and it does not enter into speculative transactions. It aims to reduce financial risk by the use of hedging instruments, operating within a framework of policies and guidelines approved by the Board.

Liquidity risk

We seek to maintain sufficient facilities to ensure access to funding for our current and anticipated future requirements, determined from budgets and medium term plans.

Under our bank facilities we have access to committed syndicated revolving credit facilities totalling £150 million until February 2017 and £100 million of various bi-lateral agreements which expire between February 2016 and February 2017.

Market price risk

The objectives of our interest rate policy are to match funding costs with operational revenue performance and to ensure that adequate interest cover is maintained, in line with Board approved targets and banking covenants.

Our borrowings are principally denominated in sterling and mostly subject to floating rates of interest linked to LIBOR. We have in place interest rate caps and swaps which limit interest rate risk. The weighted average duration to maturity of these instruments is a little under 18 months.

Foreign currency risk

Transactional currency translation

The revenues and costs of our trading entities are typically denominated in their functional currency. Where a material trade is transacted in a non-functional currency, the entity is required to take out instruments through the centralised Treasury function to hedge the currency exposure. The instruments used will normally be forward currency contracts. The impact of retranslating any entity's non-functional currency balances into its functional currency was not material.

Consolidation currency translation

We do not hedge the impact of translating overseas entities trading results or net assets into the consolidation currency.

In preparing the consolidated financial statements, profits and losses from overseas activities are translated at the average exchange rates applying during the year. The average rates used in this process are disclosed on page 17.

The balance sheets of our overseas entities are translated at the year-end exchange rates. The impact of changes in the year-end exchange rates, compared to the rates used in preparing the 2012 consolidated financial statements, has led to a decrease in consolidated net assets of £13.0 million (2012: £8.4 million decrease).

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report. Our financial position, cash flows, liquidity position and borrowing facilities and details of financial risk management are described in the Financial review.

The majority of our revenue is derived from long-term contracts, which provides a strong future workload and good forward revenue visibility. We have access to committed debt facilities totalling £250 million until a range of dates that extend beyond at least February 2016. As a consequence, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Consolidated income statement

For the year ended 31 December 2013

Consolidated statement of comprehensive income

For the year ended 31 December 2013

Consolidated balance sheet

At 31 December 2013

Consolidated statement of changes in equity

The £49.0 million merger reserve represents £16.4 million premium on the shares issued on the acquisition of Robert M. Douglas Holdings Plc in 1991 and £32.6 million premium on shares issued in the acquisition of MacLellan Group Plc in 2006.

The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the How Group, Bandt and Interserve Employee Benefit Trust. The market value of these shares at 31 December 2013 was £5.3 million (2012: £2.5 million).

The accumulated balance of translation differences, incorporated within the Hedging and translation reserve, amounts to £22.3 million (2012: £35.2 million).

Consolidated cash flow statement

For the year ended 31 December 2013

Notes to the Consolidated Financial Statements

For the year ended 31 December 2013

1. General information

Interserve Plc (the Company) is a company incorporated in the United Kingdom. The financial information in this announcement, which was approved by the Board of Directors on 28 February 2014, does not constitute the Company's statutory financial statements for the years ended 31 December 2013 or 2012 but is derived from these accounts.

Statutory accounts for 2012 have been delivered to the Registrar of Companies and those for 2013 will be delivered following the Company's annual general meeting. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under section 498(2), (3) or (4) of the Companies Act 2006. The Company expects to publish its statutory accounts that comply by the end of March 2014.

2. Accounting policies

These financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments.

The annual financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. 

Other than noted below, the accounting policies and methods of computation followed in these financial statements are consistent with those as published in the Group's Annual Report and Financial Statements for the year ended 31 December 2012 which are available on the Company's website at www.interserve.com. In addition, the accounting policies used are consistent with those that the directors have used in the Annual Report and Financial Statements for the year ending 31 December 2013.

These financial statements are the first in which the Group has adopted IAS 19 (Revised) Employee Benefits, which has been applied retrospectively. As the Group has always recognised actuarial gains and losses immediately, there is no effect on prior periods' defined benefit obligation and balance sheet disclosure. For the year ended 31 December 2013, the consolidated income statement is £4.1 million lower and the statement of comprehensive income is £4.1 million higher than it would have been prior to the adoption of IAS 19 (Revised), and for the year ended 31 December 2012, the consolidated income statement is £2.5 million lower and the statement of comprehensive income is £2.5 million higher than it would have been prior to the adoption of IAS 19 (Revised). Earnings for share for 2013 are 3.1p lower, and earnings per share for 2012 are 1.9p lower, respectively, than they would have been prior to adoption.

3. Business and geographical segments

The Group is organised into four operating divisions, as set out below. These divisions are the basis on which the Group reports its primary segment information.

· Support Services: provision of outsourced support services to public and private-sector clients, both in the UK and the Middle East.

· Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and through Middle East associates.

· Equipment Services: design, hire and sale of formwork, falsework and associated access equipment.

· Investments: transaction structuring, and management of, the Group's project finance activities. The Investments' segmental figures represent the Group's share of the associated special purpose companies.

Costs of central services, including those relating to managing our PFI investments and central bidding activities, are shown in "Group Services".

Notes to the Consolidated Financial Statements

For the year ended 31 December 2013

Business segments