Interserve Regulatory News (IRV)

News Release

28 February 2017

Annual Results 2016

Interserve, the international support services and construction group, reports its annual results for the year ended 31 December 2016.

Highlights

· Revenue constant at £3.2 billion, with growth from international businesses, offset by a modest decline in UK Support Services, due to delays in Government procurement around the 2015 General Election and Brexit uncertainties 

· Headline total operating profit of £124.2 million. Strong performances from Equipment Services and Construction International and resilience in Support Services UK, offset by weak performance from Construction UK

· Exited business: exceptional charge of £160 million, due to delays and performance issues on Energy from Waste contracts

· Equipment Services strategic review concluded and updated strategy being implemented

· Strong underlying cash generation, gross operating cash flow of £239.2 million. New banking facilities in place to address cash outflows from exited business

· Dividend per share 8.1p - no final dividend proposed in order to enhance liquidity levels while continuing to invest in our core businesses

· Strong future workload of £7.6 billion, with particularly strong workload growth in Construction International

· Key contract wins with both new and existing clients including the Defence Infrastructure Organisation, the Home Office, BBC, JLL, Land Securities, Severn Trent, Meraas (Dubai), SEPCO (Oman) and InterContinental Hotels Group (Qatar)

· CEO succession well advanced

Chief Executive Adrian Ringrose commented:

"2016 was a mixed year for the Group. We delivered a strong cash performance and the majority of our businesses performed well despite political and economic uncertainties, together with the impact of the National Living Wage in the UK. However, the performance of our UK Construction business was disappointing, and we are focussing our efforts on improving and re-shaping this business.

Managing the challenges of exiting from the Energy from Waste sector remains a significant priority. As previously announced, we have increased the exceptional provision for exiting this market and the associated contracts to £160 million. We expect to complete substantially all of the construction and commissioning of the projects during 2017, although our contractual obligations in respect of warranties, and the resolution of claims will continue for a period thereafter.

While liquidity available to the group is adequate, having put in place new banking facilities that expand and extend our debt capacity, the Board has a medium term objective to reduce our overall indebtedness and enhance liquidity levels further whilst continuing to invest in our core businesses. We have therefore taken the difficult decision to suspend the dividend temporarily.

Despite the increased uncertainty following the UK's EU referendum, our outlook for the current year remains positive. This, together with our strong market positions and healthy future workload, underpins the Board's confidence in our medium term prospects."

- Ends -

For further information please contact:

Rhys Jones, Group Head of PR +44 (0) 7909 605336

Robin O'Kelly, Group Director of Communications +44 (0) 7786 702526

Richard Campbell/Michael Kinirons +44 (0) 203 219 8816

CNC Communications

About Interserve

Interserve is one of the world's foremost support services and construction companies. Our vision is to redefine the future for people and places. Everything we do is shaped by our core values. We are a successful, growing, international business: a leader in innovative and sustainable outcomes for our clients and a great place to work for our people. We offer advice, design, construction, equipment, facilities management and frontline public services. We are headquartered in the UK and listed in the FTSE. We have gross revenues of £3.7 billion and a workforce of circa 80,000 people worldwide.

www.interserve.com

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This announcement contains inside information

Legal identifier number: 549300MVYY4EZCRFHZ09

\* This news release and the Annual Report include a number of non-statutory measures to reflect the impact of non-trading and non-recurring items. Use of these non-statutory measures is considered to better reflect the underlying trading of the business. See note 15 to the condensed consolidated financial statements for a reconciliation of these measures to their statutory equivalents and note 9 for calculation of earnings per share.

CHAIRMAN'S STATEMENT 2016

Results and dividend

Interserve Plc today announced its preliminary results for 2016, the first year under my Chairmanship.

2016 was a challenging year for Interserve. We had solid results in our core businesses, with a strong year for equipment services, continued growth in International Construction and further good progress in frontline and support services, backed by an improved cash performance.

This performance was overshadowed by the serious challenges posed by the legacy of our participation in the Energy from Waste (EfW) business and the escalation in the costs of exiting that sector. These contracts have been beset with contractual problems, failures in our supply chain and complex technical issues. We have undertaken a further detailed review of this exited business, including the potential impact of our termination on the Glasgow contract and the insolvency of one of our major subcontractors. As a result, we announced last week that it was necessary to increase the exceptional loss by £90 million. In arriving at this position, we have undertaken a detailed and thorough analysis of the situation and made a reasonable, prudent assessment of the potential outcomes. I must stress, however, there remains a range of possible outcomes and it will be some time before we have full visibility of the actual final cost of resolution. I can assure you of three things however:

- our construction teams will leave no stone unturned to try to ensure that we complete the ongoing EfW contracts as efficiently as possible;

- we have an excellent team of legal and technical experts who will do all that is necessary to protect our position and resolutely pursue our rights in the disputed areas; and

- the overwhelming majority of the Interserve leadership and employees will remain focused on continuing to improve and grow our core businesses by competing effectively in the marketplace and continuing to provide outstanding customer service.

During 2016 we undertook a strategic review of our Equipment Services business, RMD Kwikform (RMDK). We concluded that RMDK is a strong, attractive business with good growth potential. We will continue to invest in this business which is founded on innovation and engineering expertise coupled with the application of world class design and logistics capability.

We have implemented a greater focus on cash flow during the year and this has become all the more important as the impact of the exited business has been increasingly onerous. In recognition of the exceptional, short term increased cash demands of the EfW exit we have also successfully secured additional bank facilities of £133 million, which raises our total available facilities and US Private Placement Notes to £640 million.

While liquidity available to the group is adequate, the Board has a medium term objective to reduce our overall indebtedness and enhance liquidity levels further whilst continuing to invest in our core businesses. We have therefore taken the difficult decision to suspend the dividend temporarily. I regret this has become necessary, but we took this decision only after examining scrupulously all alternatives. The need to ensure that future dividends are sustainable and covered by operating cash generation and a strong balance sheet is fundamental. Improving the Group's performance and prospects amidst continuing economic uncertainty also requires that we continue to invest and grow the level and flexibility of liquid resources.

Board Changes

In November we announced that Adrian Ringrose will step down from the Board and leave the company once a successor has been appointed. Adrian has played a key role in the growth and reshaping of the business during his 13 years as Chief Executive and I would like to thank him for his contribution and for his continued loyalty and dedication to the company. I am very conscious that our shareholders and our employees are keen to learn the result of our CEO selection process. We have undertaken a comprehensive search and selection process which is now nearing its conclusion and I hope to be in a position to make a further announcement shortly.

I am delighted to welcome Gareth Edwards, who joined the Board on 1 February 2017 as a non-executive director. Gareth has extensive experience as an advisor to Boards and CEOs and considerable commercial and international experience and I am confident he will make an excellent contribution to the board.

Sustainability

We recognise the vital importance of our social and community responsibilities, our employee brand, and our environmental impact. Our commitment to these issues was recognised with the 2016 PLC Award for 'Achievement in Sustainability', and a 3-star rating in Business in the Community's 2016 corporate responsibility index.

The skills agenda is central to Interserve, and we have successfully expanded our work placement, internship and graduate schemes and continued to increase the number of apprenticeship opportunities we provide. We also continue to increase our focus on diversity and inclusivity, evidenced by our achievement of the National Equality Standard accreditation.

The creation of Social Value is a key part of our public services proposition, reflected in our support of the Buy Social Corporate Challenge, led by Social Enterprise UK and the Cabinet Office, our leadership of the Social Value Summit, and our innovative work with Social Enterprises throughout our business.

Our people

Attracting and retaining the best people is a critical challenge for any organisation, and our strong culture and values are proving to be increasingly effective as shown by a marked improvement in our overall employee engagement. This will always be a work in progress, but it is gratifying to move above the peer group average and make such positive progress. On behalf of the Board, I would like to thank all our people for their continued hard work and dedication in what has been an exceptionally tough year.

Prospects

The next 12 months will witness the introduction of a number of further regulatory changes which will add costs to our UK Support Services business. Some, such as the apprenticeship levy, also create business opportunity (in helping other employers deliver their apprenticeship programmes) whereas others, such as increased pension costs and other employment benefits will take some time to pass on fully to customers. Such changes, together with the broader uncertainties arising from Brexit preparations are challenging, but also create opportunity as clients look to solutions such as outsourcing in order to capture efficiency gains. We are able to seek to achieve productivity gains through continued investment in operational efficiency. We benefit from a large and stable order book (£7.6 billion) and are experiencing encouraging levels of contract bidding opportunities across our core markets, which underpins our expectation of modest volume growth and of stable overall performance in 2017 relative to 2016.

The lower oil price and consolidation and reorganisation among some of the main oil and gas players in the region has led to some contraction in the addressable market for our international support services business. This slowdown, the impact of which was witnessed in the second half of 2016, is expected to suppress volumes in 2017. We have been and will continue to take mitigating action on our cost base where possible.

We expect to see continued positive momentum in Equipment Services as we invest further in growth markets, new technologies and products to differentiate our engineering-led customer value proposition. The structural drivers for global infrastructure remain healthy and our proven ability to identify and respond as market demand shifts globally, underpins our confidence in the division's prospects.

In the near term our focus will be on consolidation and on re-establishing the quality of earnings in our continuing UK construction operations.

Our international construction business continues to trade well and grow its workload with market conditions remaining generally positive. In the Middle East, our combination of strong customer and partner relationships provide a platform for future growth, as do development plans such as Qatar's 'Vision 2030', the UAE's plans for Expo 2020 and the ongoing need for infrastructure development to keep pace with rapid population growth in the region.

Recognising the different characteristics and prospects of our various markets, as described above, we anticipate overall Group performance in 2017 to be stable compared to 2016.

Glyn Barker

Chairman

28 February 2017

STRATEGIC REPORT

OPERATIONAL REVIEW

The Operational Review refers to a number of alternative performance metrics; it is considered these better reflect the underlying performance of the business. See note X for the basis of calculation.

Support Services

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

1Including share of associates.

2Operating margin is calculated based on the underlying operating margin of associates and the reported operating margin of subsidiaries.

3Future workload comprises forward orders and pipeline. Forward orders are those for which we have secured contracts in place and pipeline covers contracts for which we are in bilateral negotiations and on which final terms are being agreed.

UK

Support Services UK delivered a resilient performance, in which we absorbed known cost headwinds and, despite emerging political uncertainties, won £1.9 billion of new work during the period. Revenue decreased by 3 per cent, reflecting the interruption to government procurement around the 2015 General Election which worked its way through our order book during the year. The division's future workload, however, grew slightly to £5.7 billion.

The margin absorbed the substantial rise in the UK National Living Wage (NLW), which came into force from April. On an underlying basis - excluding the impact of the NLW - margins rose by c20 basis points, reflecting improved productivity and a strong operational performance across the division.

The UK government has been our largest customer for many years, and we continue to be one of its largest suppliers, winning a number of important new contracts during the year. We strengthened our position as one of the Ministry of Defence's largest infrastructure partners during the period, winning a five-year contract worth £230 million with the Defence Infrastructure Organisation to provide facilities services to the United States Air Force's (USAF) UK estate. The addition of this contract means we now manage services at the six USAF main bases in the UK and their associated satellite sites, as well as the National Training Estate, Welbeck Defence Sixth Form College, the Defence Communications Services Agency and the Permanent Joint Overseas Bases (Falklands, Ascension, Cyprus and Gibraltar).

We also won new work and extended existing contracts to provide total facilities management (TFM) services including maintenance, cleaning, catering and security support for the Home Office. The new five-year contract covers more than 200 sites serving key Home Office departments including the College of Policing, HM Passport Office, UK Border Force and UK Visas and Immigration.

We achieved further success by securing a new five-year TFM account worth over £40 million, known as the 'Affiliate Cluster'. The account covers the Cabinet Office, the Department for International Development, the Food Standards Agency, the Government Actuary's Department, the Health and Safety Executive and the Office for Standards in Education, Children's Services and Skills (Ofsted). It is the first time that these six departments' facilities management services will be handled by a single provider. We were also awarded a two-year account extension with the Environment Agency, building on our relationship with the department and our existing partnership with the Department for Environment, Food and Rural Affairs, which allows us to unlock combined operational efficiencies and create further value for both organisations.

Our position as one of the UK's leading providers of facilities services to the retail sector was reinforced by our success in winning contracts during the year at 26 UK shopping centres. Significant amongst these were a three-year, £60 million appointment by JLL to provide services at 18 locations and a £37.5 million contract for services at eight of Land Securities' flagship shopping centres.

More broadly in the commercial sector we won new facilities management contracts with energy group, SSE, and gas distribution company, SGM as well as beauty group, L'Oreal. Additionally, we secured a two-year extension of our national contract for security services to the BBC worth £20 million. Our significant presence in the transport sector was further strengthened by our success in securing extensions with existing clients, East Midlands Trains and Spain's RENFE Viajeros.

Our sustainability credentials play a large part in our winning of new contracts and retention of existing work. During the year our facilities management team working with law firm CMS Cameron McKenna (where we deliver services including mechanical engineering, security and helpdesk support) won the Platinum Clean City Award for achieving a 10 per cent energy reduction across the client's estate.

We continued to embrace and drive innovation, benefitting our customers and making our services evermore efficient. During the year we supported Sainsbury's in trailing the Intellibot - a hands-free robotic cleaning machine - in its stores and we now also maintain a fleet of robotic transporters that move heavy loads such as laundry and waste around Alder Hey Children's Hospital in Liverpool. As part of our facilities management contract with the University of Sussex, we also used Unmanned Aerial Vehicles (UAVs) to identify potential leaks in the campus' district heating system.

Our front-line public-services business (welfare, skills, healthcare and justice) continues to grow and develop well. In Justice, we implemented our comprehensive change-management plan by introducing a new operating model for the provision of probation and rehabilitation services for low and medium-risk offenders in five areas of England as part of the Ministry of Justice's Transforming Rehabilitation programme. We are the largest provider (by volume) of such contracts, which continue to perform in line with our expectations.

Our healthcare business, which provides nursing care in the home for high-acuity patients, delivered a resilient, profitable performance during the year and is well placed to continue to perform well in 2017. Our learning and employment business supported customers into over 3,300 jobs during the year and won a range of contracts to provide skills support to local people and employers across Leeds, Leicestershire, Sheffield, Staffordshire and the North East of England and, separately, help young people onto apprenticeships and training schemes in Yorkshire. Our capability in designing, delivering and evaluating apprenticeship training within our learning and skills business will, we believe, play an increasingly valuable role as higher employment costs and regulatory requirements drive employers to invest more in training and skills (either to defray their apprenticeship levy or to gain additional productivity from an increasingly costly workforce).

International

Internationally we provide outsourced services in sectors such as hospitality, leisure, education, defence, retail, and oil and gas across the Middle East region. Our oil and gas services business, which accounts for the majority of this division, provides essential maintenance services to national oil companies in Abu Dhabi, Oman and Qatar. The division delivered strong revenue growth over the year but saw a significant reduction in activity and in profit in the second half, reflecting continued low oil prices and the cumulative impact on clients' spending.

We have taken pre-emptive actions to reduce the size and cost base of our operations in response to these market conditions, which we expect to remain challenging during at least the first part of 2017. We have also diversified our operations in Qatar and Oman, winning work in new areas such as the water and power sectors. Work to integrate our oil and gas services business across the region is progressing well, enabling us to improve the efficiency of our back office, and to bid for work on a pan-regional basis.

In Qatar, we successfully completed the Steam Header Project for RasGas, replacing 10 kilometres of steam pipeline, and were also awarded a £76 million contract by Occidental Petroleum to provide onshore engineering and fabrication services. We had a good year in Oman, winning a two-year extension on the Oman LNG maintenance contract worth £13 million and, separately, are nearing completion of our works on the Muscat-to-Sohar Product Pipeline Project.

Our developing position in the Middle East facilities management market continues to benefit from our ability to leverage our extensive UK experience and long-standing customer relationships in the region.

Highlights during the period included winning an integrated facilities management contract with Emaar, one of the UAE's largest developers, to provide services at all of its community and retail centres across Dubai. We also won a contract with Meraas (another major UAE developer) to provide integrated FM services at its first roadside food truck park in Dubai.

Our joint venture in Saudi Arabia with the Rezayat Group (Interserve Rezayat) won facilities management contracts for around £11 million of services on the Al Waha project - part of the King Abdullah Economic City development.

Interserve continues to drive standards forward in the region and we achieved a number of significant advances in, and awards for, sustainable procurement, waste reduction and staff training during 2016, all of which align closely with our SustainAbilities goals.

Equipment Services

Equipment Services, which trades globally as RMD Kwikform (RMDK), provides engineering solutions in the specialist field of temporary structures needed to deliver major infrastructure and building projects. It is a global market leader and our engineers solve complex problems for our customers, through the application of world-class design and logistics capabilities, backed up by technology and an extensive fleet of specialist equipment. Our activities have a broad geographic spread, the mix of which can change quickly, hence we manage our equipment fleet globally, combining our scale and expertise with agility and responsiveness to meet customers' needs and safeguard our operational efficiency. 

Results summary 2016 2015 Change

Performance in the period was excellent. Our strong growth momentum, bolstered by sustained, but disciplined, investment in the fleet and focus on growth markets, continued as we delivered revenue growth of 8 per cent.

Contribution to total operating profit increased by 9 per cent to £48.6 million, reflecting strong pricing strategies and a focus on supply-chain management and fleet logistics which continued to drive fleet utilisation improvements. It is notable that the profitable growth occurred across a broad range of our markets, rather than in any one individual territory, as described below, and, in aggregate, away from the Middle East.

In Asia-Pacific, we delivered strong performances in Hong Kong and the Philippines, driven by our ongoing work on large-scale infrastructure projects, including the Kowloon Rail Terminus, the Hong Kong Macau Bridge and the Manila Bay Development.

The North American business has made good progress in 2016 winning sizeable jobs along the west coast of the USA, particularly around Los Angeles and San Francisco, and Texas. In South America trading conditions remain tough but project wins in Peru offer some optimism for our prospects in the region. 

We again performed well in the Middle East, though volumes and profits represented a smaller proportion of the overall result than in previous years. We benefitted from the continuation of a number of large projects started last year, including the East:West Highway project in Qatar. Demand also continued to grow in the UAE, where we won work on the Dubai Ports Bridge project and in Saudi Arabia, where we started work on the Jeddah Metro scheme.

In the UK we delivered another strong performance, winning work on several major projects, including the Mersey Gateway Bridge, the Medway crossing, the National Automotive Innovation Centre and the Defence National Rehabilitation Centre. Work also continues on sizeable rail improvement projects in Reading and on the Stockley Viaduct project near Heathrow airport.

In February 2016 we announced that, following several years of substantial growth across the Group, we would conduct a strategic review of RMDK to assess the full range of options to maximise value for shareholders. Following the strategic review, we announced in October 2016 that the Board had concluded that Interserve remains the best owner for this business, and that retaining RMDK as a core part of the Group, with an updated strategy, best enables sustainable value creation for shareholders.

Since then we have begun implementing our plan. We are investing further in new technologies (to augment our already extensive in-house 3D virtual reality and gaming-based applications and differentiate further our engineering-led customer value proposition), and in growth markets to develop a stronger position and improved financial performance. As part of this we have launched new products within the UK ground shoring market, complementing our existing strengths in falsework and formwork. Additionally, we are exiting some of our smaller, less attractive markets including Singapore and Colombia and have rationalised part of the product range. Details of the costs associated with these actions can be seen in note 4 on page 33. We set up Kwikform College in South Africa during the year to equip our growing workforce with a broad range of skills including sales and design and to offer advice on less traditional topics such as work/life balance, nutrition, negotiation skills and time management.

Construction

We offer design 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 (in UAE, Qatar and Oman) is structured through longstanding joint-venture partnerships, enabling us to form enduring relationships with clients and to combine our international experience with our partners' local knowledge to deliver outstanding service.

1Excluding Exited Business

2Share of associates.

3Operating margin is calculated based on the underlying operating margin of associates.

UK

Our UK Construction business, excluding the Exited businesses (reported separately, below), delivered a disappointing performance. The continuation of a long period of challenging market conditions, coupled with pockets of underperformance in operational delivery in a number of contracts, off-set strong performances in most of our regional businesses, resulting in a net loss result for the division.

These results, allied to the difficulties around the Exited business, have led to a series of senior management, procedural and other organisational changes across the division, which will continue this year. We are also investing in new management information systems to improve scrutiny of and risk assessment in our operations. Strategically, we have narrowed our focus for work winning to core sectors and activities and have refined the risk profile of work that we take on.

Reflecting this increased selectivity in work winning our future workload fell 12 per cent to £1.2 billion, the substantial majority of which is focused on low-risk projects with an average value of less than £10 million, constructing a range of buildings and infrastructure often under framework agreements with public-sector customers and utility companies. Notwithstanding the uncertainty following the EU Referendum vote, which has begun to impact on the London fit-out market with some project deferrals, our assessment is that demand within our core areas remains adequate to meet our modified volume, risk and return aspirations for the business.

During the year we secured a place on the Department of Health's £4 billion ProCure22 (P22) construction framework, which continued our 14-year role on UK health frameworks, through which we have delivered over £1 billion of diverse healthcare facilities across more than 250 projects, including the UK's first Proton Beam therapy unit, currently under construction at The Christie in Manchester. We also won a place on the new £750 million Eastern Highways Alliance Framework, which covers 11 local highways authorities across the East of England.

Our strong presence in the utilities sector was reinforced with new contract wins worth more than £200 million. These included the Birmingham Resilience 'Treated Water' contract for Severn Trent (in joint venture with Kier), and, (in joint venture with Doosan Enpure), a contract with Northumbrian Water to upgrade the Horsley water treatment works in the Tyne Valley. We were also selected by South West Water to deliver a new water-treatment plant, which will serve Plymouth and the surrounding area.

In another of our longstanding core markets, education, we were selected to design and build a three-storey development at the University of York and also to design and build two new student accommodation buildings in Leamington Spa for Alumno Developments.

Where appropriate we continue to be at the forefront of innovation in the industry, for example increasing our use of Unmanned Aerial Vehicles to undertake surveys in areas where access is difficult or restricted, enabling us to provide innovative designs and reduce delivery costs; and the design and delivery of Ingenuity House - an exemplar sustainable workplace of the future for our Midlands-based staff.

International

International Construction continued to gain momentum in improving markets stimulated by development plans such as Qatar's 'Vision 2030', the UAE's plans for Expo 2020 and the ongoing need for infrastructure development to keep pace with rapid population growth in the region.

Contribution to operating profit in our associate businesses rose by 30 per cent to £16.9 million (2015: £13.0 million), with a strong increase in volume and margins strengthening to 5.5 per cent (2015: 4.3 per cent). Future workload increased to £0.4 billion (2015: £0.3 billion).

Market conditions in the UAE were largely good with key contract wins including the £75 million expansion of the City Centre mall in Ajman for Majid Al Futtaim, a client for whom we have worked extensively on numerous projects, including Dubai's flagship Mall of the Emirates (the significant extension of which we completed and handed over during the year). We also won a £40 million contract to design and build a new office tower at the Dubai International Financial Centre as well as a contract to build a 389-room Premier Inn hotel in Dubai.

In Qatar, we are making good progress in delivering Doha Festival City with joint-venture partner ALEC, where (also in joint venture with ALEC) we have also won a £120 million contract to design and build a five-star hotel for the InterContinental Hotels Group. The market continues to show few immediate signs of the long-awaited resurgence. Nevertheless, we remain confident of its medium-term prospects and are carefully controlling our resources in anticipation of activity growth towards the end of 2017.

In Oman, we successfully delivered the extension to Muscat City Centre (again for Majid Al Futtaim) and completed the £55 million Sohar Refinery Improvement Project for the Oman Oil Refineries and Petroleum Industries Company. Activity levels in downstream industrial development are healthy in Oman and since the year end we have won contracts for civil and building works for the new 445 MW combined power plant in Salalah for SEPCO and for £120 million worth of buildings, civils and underground piping work on the Liwa Plastics project.

Our training centres in Dubai and Qatar, which run a full trades training curriculum taught by Construction Industry Training Board qualified tutors, enabled us to continue to invest in the skills and workmanship of our workforce, delivered over 55,000 training days in 2016.

Exited Business

In November we were served notice of termination on the Glasgow Recycling and Renewable Energy project. We have considered the implications of this development with our legal advisers and expect a lengthy period of litigation to ensue. Alongside this exercise we have continued to undertake a detailed review of operational developments on the other contracts in our exited EfW business, including the impact of the entering into administration by our principal gasification subcontractor, Energos, together with the likelihood and timing of potential recoveries and claims from third parties.

In the light of these developments and of the continuing uncertainties in relation to the final conclusion of our EfW contracts, we have concluded that the exceptional loss of £70 million announced in May 2016 is no longer adequate to reflect the incurred and anticipated losses associated with this business. Consequently, we have determined that it is appropriate to increase the exceptional loss for exiting this market and the associated contracts to £160 million.  We expect to complete substantially the construction and commissioning of the projects during 2017, although our contractual obligations in respect of warranties, and the resolution of claims will continue for a period thereafter. Further cash outflows of c£60 million are expected during 2017 as the income statement charge is utilised.

Managing the challenges of exiting from these projects and of pursuing our entitlements to recoveries and claims from third parties remains the focus for the large, experienced team of commercial, operational and legal experts we have deployed and will remain an area of critical focus for the foreseeable future.

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 rose 7 per cent to £25.2 million (FY 2015: £23.6 million), due principally to investment in back-office capabilities, IT infrastructure, people development and communications. We anticipate this increased level of investment will continue in the medium term, as we continue to scale our support and assurance functions appropriately with the growth of our operational businesses. This investment is also reflected in an increased level of capital expenditure as we continue the construction of a new Midlands hub into which we will consolidate many of our back-office activities.

Outlook

Our near-term development will continue to be played out against a backdrop of mixed economic conditions.

Support Services UK

The next 12 months will witness the introduction of a number of further regulatory changes which will add costs to our UK Support Services business. Some, such as the apprenticeship levy, also create business opportunity (in helping other employers deliver their apprenticeship programmes) whereas others, such as increased pension costs and other employment benefits will take some time to pass on fully to customers. Offsetting these headwinds, we are able to benefit from productivity gains generated by the substantial investment we have made in our own back office and customer facing systems and processes. In aggregate we therefore expect margins to remain resilient.

We continue to benefit from a large and stable order book (£5.7 billion) and to see encouraging levels of contract bidding opportunities across our core markets, as clients increasingly look to solutions such as outsourcing in order to capture efficiency gains to offset their own rising costs. This underpins our expectation of modest volume growth and of a stable overall performance in 2017 relative to 2016.

Support Services International

The lower oil price and consolidation and reorganisation among some of the main oil and gas players in the region has led to some contraction in the addressable market. This slowdown, the impact of which was witnessed in the second half of 2016, is expected to suppress volumes in 2017. We have been and will continue to take mitigating action on our cost base where possible. Notwithstanding these short-term pressures, we expect a more favourable 2018 outlook as markets stabilise.

Equipment Services

We expect to see continued positive momentum in Equipment Services as we invest further in growth markets, new technologies and products to differentiate our engineering-led customer value proposition. The structural drivers for global infrastructure remain healthy and our proven ability to identify and respond as market demand shifts globally, underpins our confidence in the division's prospects.

Construction UK

Managing the challenges of exiting the remaining EfW projects is a significant priority, as is ensuring our processes continue to improve given the lessons we have learned. In the near term our focus will be on consolidation and on re-establishing the quality of earnings and the appropriate risk:reward profile in our continuing UK construction operations. In more stable market conditions overall, we believe there is sufficient demand to enable us to achieve this objective at broadly current revenues.

Construction International

Our International Construction business continues to trade well and grow its workload with market conditions remaining generally positive. In the Middle East, our combination of strong customer and partner relationships that have developed over more than 30 years provide a platform for future growth, as do development plans such as Qatar's 'Vision 2030', the UAE's plans for Expo 2020 and the ongoing need for infrastructure development to keep pace with rapid population growth in the region.

Overall

Recognising the different characteristics and prospects of our various markets, as described above, we anticipate overall Group performance in 2017 to be stable compared to 2016.

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 preservation and 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. More information about how we manage risk can be found in the 2016 Corporate Governance Report. The table below details the principal risks and uncertainties which the Group addresses through its risk-management measures. The changes to these risks relative to the last bi-annual review undertaken by the Board in August 2015 are depicted in the column entitled "Risk Environment".

The Group continues to have no material exposure to currency risks. Whilst it does not trade in commodities, the Group does operate in countries where their economies depend upon commodity extraction and are therefore subject to volatility in commodity prices. The Group's principal businesses operate in countries which we regard as politically stable.

Financial review

Revenue and operating profit

For commentary on the operational results and highlights of the year please refer to the Operational Review section of the Strategic Report on page 5.

Net interest charge

The net interest charge for the year of £17.7 million can be analysed as follows:

The increased interest charge on Group debt of £18.8 million (2015: £16.7 million) reflects higher average net debt levels in 2016, principally driven by the impact of the loss-making exited businesses. 2016 average net debt stood at £390.9 million.

The pension finance credit is calculated based on the funding position at the end of the preceding year. Consequently, the 2015 IAS 19 pension surplus position resulted in a 2016 pension finance credit of £1.1 million (2015: £0.3 million credit). In 2017 this will become a pension finance charge, reflecting the £52.4 million IAS 19 deficit position as at 31 December 2016; this charge is expected to be in the region of £2.0 million in 2017.

Pensions

At 31 December 2016 the Group had an IAS 19 pension deficit of £52.4 million (2015: £17.2 million net surplus).

Although the aggregate investment portfolio delivered a strong return this was not sufficient to prevent the scheme moving from a surplus position at year end 2015 to a deficit position at year end 2016. The key elements in this movement were a reduction in the liability discount rate from 3.8 per cent in 2015 to 2.8 per cent in 2016 (reflecting the continued low yields on bonds) and an increase in anticipated RPI inflation from 3.1 per cent to 3.3 per cent.

Looking to 2017 it is anticipated that these macro-economic factors will lead to an increase in our overall pension costs of £5 million-£10 million.

Cash contributions into the pension scheme, however, will remain unchanged until the next triennial valuation, due in 2018 on the position as at December 2017. The existing deficit recovery payments of £12 million per annum, indexed for inflation, will continue until that date.

Taxation

The tax charge for the year of £7.5 million is further analysed below. 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.

The Group companies' effective rate stands at 14.5 per cent, below the UK corporation tax rate of 20.0 per cent, due to the impact of profits in lower tax Middle East locations and the utilisation of prior year losses.

Tax credits arising on the amortisation of intangible assets and on other exceptional items have remained at broadly stable rates from 2015.

No tax credit has been recognised on the charges relating to the exited business and the exceptional items relating to the strategic review of Equipment Services. This reflects a prudent approach to the speed of possible utilisation, particularly in overseas jurisdictions we have subsequently exited.

NEW ACCOUNTING STANDARDS

IFRS 9 Financial instruments

The impact of the sections of IFRS 9 currently issued will result in the Group's project finance interests that are currently treated by the joint venture companies as being available-for-sale, being treated as a debt carried at "fair value through profit or loss" or "amortised cost". As a result, movements in the fair value will no longer be taken to "Other comprehensive income".

IFRS 15 Revenue from contracts with customers

The new standard will replace IAS 18 Revenue and IAS 11 Construction contracts. It will become effective for accounting periods on or after 1 January 2018, at the earliest. The main impact of the standard will be to require the recognition and disclosure of revenue to be based around the principle of disaggregation of discrete performance obligations.

IFRS 16 Leases

The new standard will replace IAS 17 Leases. It will become effective for accounting periods on or after 1 January 2019, at the earliest. It will require nearly all leases to be recognised on the balance sheet as liabilities, with corresponding assets being created.

In advance of the adoption of IFRS 9, IFRS 15 and IFRS 16, the Group will conduct a systematic review to ensure that the impact and effect of the new standards are fully understood, and changes to the current accounting procedures are highlighted and acted upon. Any impact is not known at this time.

Except for IFRS 9, IFRS 15 and IFRS 16 noted above, the directors do not currently anticipate that the adoption of any other standard and interpretation that has been issued but is not yet effective will have a material impact on the financial statements of the Group in future periods.

Dividend

No final dividend is proposed for the year. The total dividend for the year is 8.1 pence (2015: 24.3 pence).

PERIOD-END Net debt and cash flow

Year-end net debt stands at £274.4 million (1.7x EBITDA) an improvement on the 2015 position of £308.8 million (1.9x EBITDA). This decrease is analysed below:

2016 was a strong year of cash generation in our continuing operations, with a gross operating cash inflow of £239.2 million. Some of this significant inflow arose from actions of a non-recurring nature, largely implemented in order to mitigate the cash requirements in the exited businesses. The majority, however, arose from structural improvements to our processes and/or the resolution of previous years' investments and imbalances. Overall, pre the funding of revenue growth, we continue to target gross operating cash conversion at 100 per cent of profits over a three-year period. Following two years of relatively high investment and consequent low cash conversion, 2016 has seen a reversal and a return of our rolling three-year conversion closer to our norms. This measure now stands at 85 per cent (three years to 31 December 2015: 42 per cent. The constituent parts of this year's performance are discussed below.

Net capex of £46.0 million (2015: £44.2 million) reflects our continued investment across the Group, in the Equipment Services equipment fleet, our customer-facing IT solutions and particularly improving our back office IT solutions. The £7.0 million net land disposal in the period reflects the progression of arrangements in respect of our Midlands Office consolidation. No profit was recognised on this transaction.

The very strong working capital inflow of £119.7 million reflects the impact of settlement of a number of final accounts, an increased focus on cash management throughout the business and the stabilisation of customer payment terms, following several periods of tightening. During 2016 we released an aggregate of £87.1 million from our receivables and inventory balances. Some of the benefit we received in 2016 from our creditor balances is expected to unwind in the current financial year. Over the coming year we would expect to continue with our programmed improvements in customer collections, the order-to-cash cycle, and the management of contract work in progress.

This strong cash performance has also been reflected in good dividend flow from our overseas joint ventures and associates, with dividends at c150 per cent of reported profits in period. This reflects both the improved underlying cashflow management within those businesses and the final settlement of a number of significant contracts in the period.

The £116.9 million cash outflow in the year (£127.3 million cumulatively since 2015) within the UK Construction exited business reflects our gross operational losses (cumulatively £181.5 million), the settlement of subcontract accounts and customer damages ahead of any recoveries from third parties. We expect approximately £60 million of further net cash outflows in 2017 as the contracts are completed and our claims are pursued. Although the timing of resolution of claims is uncertain, ultimately the contract cash and profit outflows will equate.

£7.7 million of exceptional items reflect the cash costs of the Equipment Services strategic review (£4.9 million) and the 2016 losses generated in those countries exited (£2.8 million) as a consequence of the review.

Investments outflow in the year of £5.2 million reflects the net position following continued investment into our property portfolio and the disposal of our investment in West Yorkshire Police in H1 2016.

The foreign exchange related increase reflects the decline in strength of sterling, which had the impact of increasing the translated value of cash balances held overseas.

AVERAGE NET DEBT AND OUTLOOK

2016 average net debt stood at c£390 million (YE 2016: £274.4 million) with main drivers of the difference being the phasing of flows on the Exited UK construction business, timing of creditor payments and the benefit of reductions in our inventory and debtor balances.

2017 average net debt is expected to be c£450 million with the key movers from 2017 presented below:

Flows from the Exited business were staggered throughout 2016 and the full-year impact of these within 2016 will increase average net debt by c£45 million. It is expected the average net debt impact of 2017 Exited business outflows will be broadly in line with the expected net full-year cashflow; however the timing of claims resolution will have a significant influence on this number. Expected cash generation from the underlying business is after the funding of obligations to both equity and debt holders.

In February 2017 we enhanced our committed borrowing facilities, these now total £640 million. These are discussed in greater detail below.

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.

We have two main committed funding sources, totalling £640 million:

· a $350 million, fully-hedged, US private placement facility with a weighted average maturity at June 2024. This amount is fully swapped out into a sterling amount of £207 million; and

· committed revolving bank facilities. Throughout 2016 these stood at £300 million with an expiry date of February 2019. During February 2017 we replaced these with new committed bank facilities totalling £433 million with a weighted average expiry date of April 2021.

These additional facilities were put in place to reflect the increased liquidity requirements of the Group, accommodating the actual and forecast outflows from the Exited business. As discussed above it is anticipated that average net debt for 2017 will be approximately £450 million. Debt facilities are sufficient on both covenant compliance and absolute net debt metrics.

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 under the US private placement are denominated in US dollars and subject to fixed interest rates. These are fully hedged back into a sterling fixed rate with foreign exchange swaps lasting for the duration of the loan period.

Our other 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 approximately one year and six 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 offset 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.

The impact of changes in the year-end exchange rates, compared to the rates used in preparing the 2016 consolidated financial statements, has led to an increase in consolidated net assets of £67.4 million (2015: £7.3 million increase).

2016 Tax strategy and risk management

Interserve understands and seeks to observe its corporate and social responsibilities as a large employer in the UK whilst seeking to ensure that it is fiscally efficient.

Governance

The Group seeks constantly to evolve its systems, processes and procedures as they relate to taxation to ensure that confidence is maintained in the Group's ability to process and deal with its taxation affairs. All tax decisions and considerations are routed through the specialist Group Tax Department prior to being considered further and, when appropriate, put forward for approval at Board level. All tax disclosures and errors are reported to the Group Tax Department which also forms the principal point of contact between the Group and HMRC.

The Group has a robust system of documented controls which are regularly reviewed to ensure they remain fit for their intended purpose and which ensure that we are able to meet our taxation obligations and the requirements of the Senior Accounting Officer (SAO) reporting obligations. A comprehensive review is undertaken each year of adherence to SAO requirements before considering whether it is necessary to draw attention to errors which may have affected the Group's ability to account for the correct amount of tax.

Responsibility for the execution of the Group's tax strategy rests with the Group Finance Director and the Head of Tax and Treasury.

Planning

Efficient management of the tax base of the Group involves structuring the Group's affairs efficiently for tax and conducting the Group's affairs in accordance with tax legislation, but does not involve or permit the use of risky or aggressive tax structures or schemes.

The Group's tax strategy is determined by the board of directors and is summarised in the following statement:

The Group will seek to manage the tax it pays i) by abiding by legal and regulatory principles, ii) by considering acceptability to stakeholders, and iii) by avoiding any acts inconsistent with the Group's reputation.

The Group seeks to create value for its shareholders and efficient management of the tax base of the Group is an integral part of that value creation, subject to the principles outlined above.

Relationship with UK tax authorities

Interserve seeks to maintain an open dialogue in the UK with HMRC regarding its plans and tax affairs, discussing potential tax issues which may arise in the business as well as initiating discussion around the suitability of the systems and controls in place to control and manage its tax position.

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 and Governance sections. Our financial position, cash flows, liquidity position and borrowing facilities and details of financial risk management are described above.

The majority of our revenue is derived from long-term contracts, which provides a strong future workload and good forward revenue visibility. In February 2017 we enhanced our committed debt facilities, see Treasury risk management section above, and these now total £640 million with a weighted average maturity of April 2022. The directors believe that the Group is well placed to manage its business risks successfully.

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, representing, at least, a period of twelve months from the date of this report. For this reason, they consider it appropriate to continue to adopt the going concern basis in preparing the financial statements.

Viability Statement

The directors have assessed the viability of the Group over a three-year period to December 2019, taking account of the Group's current position and the potential impact of the principal risks documented in the Strategic Report. The choice of a three-year period accords with the strategic planning horizon considered in the Groups budget process. Based on this assessment, the directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2019.

In making this statement the directors have considered the resilience of the Group, taking account of its current position, the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period. The presence and effectiveness of internal audit and other review processes has also been assessed, these are discussed in the Governance section of the 2016 Annual Report.

The directors have determined that the three-year period to December 2019 is an appropriate period over which to provide the viability statement. In making this assessment the directors have taken account of a number of factors including:

· the Group's financial position with £640 million of committed bank facilities with a weighted average maturity of April 2022;

· potential mitigants to any cash outflows in the form of possible restrictions on dividends and capex;

· the expected future cashflow profile on the Group's Exited business activities;

· the diversified and blue-chip nature of the Group's client base;

· the long-term secured nature of the Group's work with £4.5 billion of work already secured in the orderbook until the end of 2019; and

· the Group's commitment to a long-term and balanced approach to doing business, as exemplified by our SustainAbilities agenda and our business plan.

The Strategic Report was approved by the Board of Directors on 28 February 2017 and signed on its behalf by:

A M Ringrose T P Haywood

Director Director

INCOME STATEMENT

Consolidated income statement

For the year ended 31 December 2016

# - restated (note 14)

Consolidated statement of comprehensive income

For the year ended 31 December 2016

Consolidated balance sheet

At 31 December 2016

Consolidated statement of changes in equity

(1)The £121.4 million merger reserve represents £16.4 million premium on the shares issued on the acquisition of Robert M. Douglas Holdings Plc in 1991, £32.6 million premium on the shares issued on the acquisition of MacLellan Group Plc in 2006 and £72.4 million premium on the shares placed to partially fund the acquisition of Initial Facilities in 2014.

(2) The hedging and revaluation reserve includes £19.9 million relating to the revaluation of available-for-sale financial assets within the joint ventures (2015: £18.2 million).

(3) The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the Interserve Employee Benefit Trust. The number of shares held at 31 December 2016 was 473,920 (2015: 494,748), with the market value of these shares at 31 December 2016 being £1.6 million (2015: £2.6 million).

Consolidated cash flow statement

For the year ended 31 December 2016

Notes to the Consolidated Financial Statements

For the year ended 31 December 2016

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 2017, does not constitute the Company's statutory financial statements for the years ended 31 December 2016 or 2015 but is derived from these accounts.

Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 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 2017.

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. 

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 2015 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 2016.

3. Business and geographical segments

The Group is organised into three operating divisions, as set out below. Information reported to the Executive Board for the purposes of resource allocation and assessment of segment performance is based on the products and services provided.

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

· Construction: design, construction and maintenance of buildings and infrastructure, both in the UK and internationally.

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

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 2016

Business segments

# - restated (note 14)

Notes to the Consolidated Financial Statements - continued

For year ended 31 December 2016

Notes to the Consolidated Financial Statements - continued

For the year ended 31 December 2016

Geographical segments

The Support Services and Construction divisions are located in the United Kingdom and the Middle East. Equipment Services has operations in all of the geographic segments listed below.

The table below provides an analysis of the Group's sales by geographical market, irrespective of the origin of the goods/services.