Interserve Regulatory News (IRV)

News Release

26 February 2015

Strong growth and strategic progress

Annual Results 2014

Interserve, the international support services and construction group, reports on a year of strong growth and strategic progress, with its annual results for the year ended 31 December 2014.

Full-year dividend 23.0p 21.5p +7%

Highlights

· Revenue growth of 33 per cent (organic growth of 10 per cent)

· Total operating profit growth of 35 per cent (organic growth of 9 per cent)

· Headline earnings per share growth of 23 per cent (organic growth of 14 per cent)

· Full-year dividend: Recommended increase of 7 per cent to 23.0p

· £4.1 billion of new business won in 2014

· Record future workload of £8.1 billion, up 26 per cent

Chief Executive Adrian Ringrose commented:

"2014 was a landmark year for the business in which we advanced our strategy and delivered 35 per cent operating profit growth including strong organic growth despite continuing challenging conditions in a number of our markets. We made two strategic acquisitions (Initial Facilities and the Employment & Skills Group), each of which deepened our presence in core outsourcing markets.

Our focus on providing high quality services to both new and existing clients resulted in strong work winning during the year, with our future workload rising 26 per cent to a record £8.1 billion.

Looking to the future, we are encouraged by the growth potential of the business. Our attractive positioning in our core markets and our ability to identify, invest in and deliver on attractive project and corporate opportunities is a powerful differentiator."

- Ends -

For further information please contact:

Rhys Jones, Group PR Manager +44 (0) 118 9602285

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

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

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 250 index. We have gross revenues of £3.3 billion and a workforce of circa 80,000 people worldwide.

www.interserve.com

For news follow @interservenews

\* 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. 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.

STRATEGIC REPORT - Chairman's Statement

Interserve made further significant progress during 2014, growing revenues by 33 per cent and adding over 23,000 new colleagues during the year. It is a central tenet of our corporate strategy to build strong core businesses. The acquisition of Initial Facilities in March added breadth and depth to our customer offering, positioning us as a top three player in the UK facilities management market. In addition our performance was underpinned by strong organic growth (a 10 per cent increase in consolidated revenues), demonstrating our potential in recovering markets and our resilience where market conditions have been more difficult.

Our strategy also envisages extending out from our core businesses to enter and grow in adjacent markets where our skills can be applied to gain competitive advantage. Since 2011, Interserve has been building its capabilities to deliver 'front line' services to the citizen, initially through the Work Programme and subsequently through our domiciliary care business. Recently we have extended our reach considerably; in December, we were selected to provide probation services as part of the Ministry of Justice's Transforming Rehabilitation programme. Also in December, we acquired The Employment & Skills Group (esg), further extending our Work Programme presence and adding capability to provide skills, training and employability services in the UK and further education in the Kingdom of Saudi Arabia (KSA). The broad range of capabilities we now possess, together with our track record as a trusted partner to UK Government, provides a significant opportunity to deliver better, and better-coordinated services to the citizen, whilst improving the outcomes sought by our clients.

During the period we expanded our support services business into a number of territories where we had existing construction and RMD activities, including in the KSA where our new joint venture with local partner Rezayat, gives us access to a significant Facilities Management (FM) market. In addition, the acquisition of esg Group adds the establishment and management of three education colleges in KSA to Interserve's portfolio. We believe that both the FM and education markets have significant potential for us; not just in KSA, but in the Middle Eastern region as a whole. Our oil and gas services businesses in the Middle East have also performed well and we took further steps to position ourselves to grow our FM activities across the region. 

In Europe, we are growing our capability to serve major clients who look for a single organisation to meet their support service needs across the continent. Some 3,000 colleagues joined us in Spain through the Initial acquisition whilst organically we expanded our work for the Foreign & Commonwealth Office and won our first cross-border commercial contract, with Sony Europe, wherein we will provide services in 27 countries.

In our construction business we delivered good revenue growth in the UK. Whilst margins have been affected by supply pressures, they remain within our expected range. This is a tribute to strong customer relationships and prudent management of the business through the economic cycle. In the Middle East, the business has delivered a solid performance in challenging, albeit improving construction markets.

Equipment Services performed strongly in 2014, benefitting from our investment over recent years in expanding the fleet in improving overall market conditions. The margins in that business have now recovered after the worldwide recession, enabling us to achieve an attractive return on investment. We opened new facilities on the US west coast, in Panama and in Cape Town, South Africa.

Health and Safety remains a critical priority for the business, especially as our continued growth results in many more colleagues to induct into the Interserve values and culture. Despite our continuing focus on safety, we did not achieve an in-year improvement in our overall rate of reportable incidents, which included one fatal incident early in the year. Our thoughts remain with those affected by this tragic event. We remain absolutely committed to our medium term target to halve our accident/incident rate over the period 2010-2019.

Our strategy is proving effective and I am very conscious that the ongoing performance of the business is achieved through the ingenuity and hard work of our people in serving our customers. I thank them all on behalf of the Board. We have always sought to recognise those individuals who epitomise our values. In 2014 we developed this further, holding our first Group-wide award scheme, celebrating our colleagues who bring our values to life, who exhibit leadership in Health & Safety and who, both individually and in teams, are role models to inspire us all.

We continue to embrace keenly our obligation to act as a responsible business, recognising that delivering real social value and sustainable shareholder value go hand in hand. During the year we made further progress in our SustainAbilities strategy and are becoming increasingly confident in the differentiation this provides for us with clients, suppliers and our own people. We are also increasingly aware of our responsibilities as a major employer to help inform, guide and influence relevant areas of public policy. In April we published a report, in association with the Social Market Foundation, on how best to boost the skills and wage prospects for the low paid in the UK. We sponsored a social value summit (recently repeated) at which a number of key political leaders and policy thinkers spoke. However, whilst publications and events are useful focal points, it is our everyday actions as a responsible employer that really matter and which are reflected in our integrated reporting of our performance in social, natural and knowledge as well as financial capitals.

BOARD CHANGES

During the year, we were delighted to welcome Nick Salmon and Russell King to the Board as non-executive directors, and members of the Audit, Nomination and Remuneration Committees. They both bring a wealth of commercial and board governance experience. Keith Ludeman assumed chairmanship of the Remuneration Committee on 9 July and David Thorpe retired from the Board in August. David left with our gratitude for the major contribution he made to the Company over five and a half years. Looking ahead, after serving over nine years on the Board, our Senior Independent Director (SID), Les Cullen, will be retiring at the forthcoming Annual General Meeting. Les will be sorely missed, but I am delighted that Russell King has agreed to assume the role of SID at that time. Finally, having been Chairman since January 2006 I have informed the Board of my intention to stand down no later than the 2016 AGM. Accordingly, the Board, under Russell King's leadership, will undertake an external search for my successor and will make further announcements in due course.

PROSPECTS

2014 has been another year of strong progress and growth for the business and looking to the future we are encouraged by its growth potential. In the majority of our markets we are seeing signs of recovery, with the business well positioned to achieve further growth so long as the more extreme global political and economic risks do not crystallise. While optimistic, we continue to manage the business prudently to ensure it remains resilient against future economic cycles.

DIVIDEND

We continue to believe our strategy is able to deliver attractive, sustainable returns for shareholders and support a progressive dividend policy. Given our confidence in the medium term outlook for the business we are recommending an increased final dividend of 15.5p (2013: 14.7p), bringing the total dividend for the year to 23.0p (2013: 21.5p), an increase of 7.0 per cent. The final dividend will be paid on 20 May 2015 to shareholders on the register at the close of business on 7 April 2015.

Lord Blackwell

Chairman

26 February 2015

STRATEGIC REPORT - Operational Review

Operational review

We segment our results into four main areas - 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 delivered strong organic growth in the UK and continued the development of the business by acquiring Initial Facilities ("Initial"), while our support services businesses in the Middle East continued to perform well. During the year we further expanded our reach in the delivery of front-line public services in the UK and broadened our offering in the Middle East facilities management market through the formation of Interserve Rezayat, a joint venture in Saudi Arabia.

UK

We delivered strong operating profit growth, up 45 per cent to £81.4 million. Our strong organic performance (up 9 per cent) was bolstered by the acquisition of Initial as we made further strategic progress on a number of fronts and built on a key aspect of our growth strategy: to broaden our offering in front line services.

In recent years we have built capability in healthcare, welfare-to-work and justice. Our welfare-to-work business, which operates in multiple UK regions providing personalised support and training, supported over 7,000 customers into employment during the year. Our healthcare business, which provides care in the home for high acuity patients, grew well, benefitting from increased investment and is well-placed to expand further during 2015. Towards the end of the year we added to our welfare offering through the acquisition of The Employment & Skills Group (esg). We also started to mobilise new contracts in the justice sector after we secured seven year contracts worth £622 million in aggregate to provide probation and rehabilitation services for low and medium risk offenders in five areas of England from February 2015 as part of the Ministry of Justice's (MoJ) Transforming Rehabilitation (TR) programme.

We remain one of the Ministry of Defence's (MoD) key delivery partners, having won a new five-year, £322 million contract to manage its National Training Estate (NTE) with the option to extend for a further five years. Our defence FM portfolio includes Welbeck Defence Sixth Form College, the Defence Communication Services Agency and the Permanent Joint Overseas Bases (Falklands, Ascension, Cyprus, Gibraltar). We were, though, unsuccessful in our bids for the Next Generation Estates Contracts which, together with the more limited scope of the new NTE contract will result in a net reduction in the scale of our Defence business in the near term.

Our work-winning was strong during the year (£2.0 billion) and we achieved a number of notable successes that reflect the diversity of our capabilities including: The Docklands Light Railway (DLR), Exterion Media, Southampton NHS Trust and the Royal National Lifeboat Institution.

Initial's performance in 2014 was in line with the Board's expectations. The first wave of integration and re-branding of the business is complete, with the final phase due to complete in 2015. As anticipated, following the acquisition we have been able to further develop our portfolio of private sector clients, for instance in the transport sector where we have developed and strengthened our presence through contract wins and extensions. In the UK we now provide cleaning at 16 major Network Rail stations and recently agreed a two year extension of our contract for services for London Underground. We also won a new contract to deliver cleaning and security services for the Docklands Light Railway. We added to our significant transport operations in Spain, covering the rail and aviation markets for clients including Iberia, Alstom and Renfe, by winning a contract to provide cleaning, maintenance and assistance to passengers with restricted mobility for Spanish airport operator Aena.

Our enlarged UK Support Services business now has a broader customer proposition and the ability to cross-sell more services to existing clients, growing single service contracts into multi-service FM packages. Examples of this include winning a £35 million contract extension with B&Q to provide services across its entire 361 store estate, up from 182 stores. We also grew the scope and size of FM contracts with Alliance Boots and Southwark Council and added to contracts with Co-op Midlands, CBRE and Deutsche Bank.

As a consequence of the developments outlined above, our revenue is now split evenly between the public and private sectors.

We successfully mobilised our five-year facilities management contract with the BBC. This involves the management and delivery of services at over 150 locations across the UK including New Broadcasting House in London and MediaCityUK in Salford, where we are responsible for services ranging from critical broadcast engineering to business continuity planning.

We have also expanded our capability to serve several of our pan-European clients. Our contract with the Foreign & Commonwealth Office (FCO) was expanded - and extended by two years - to deliver support services in France, in addition to the FM services we already provide to the FCO's UK estate and to 14 diplomatic missions across Europe. Our reach was further developed through our appointment by Sony Europe to support their business in 27 countries, providing services at 40 locations.

International

Internationally we provide a broad range of facilities management services in sectors such as hospitality, leisure, education, defence and retail and, through esg, the operation of further education colleges in Saudi Arabia. We also offer maintenance, turnaround services and training to the oil and gas sector in the United Arab Emirates (UAE), Qatar and Oman.

A mix of contract wins with new and existing customers, particularly those in the oil and gas, defence and education sectors, delivered very strong organic operating profit growth of 37 per cent, which together with the full-year impact of businesses acquired during 2013, resulted in overall growth in operating profit of 80 per cent to £7.4 million.

Highlights during the year included winning a new three year contract to provide Qatar Shell GTL with a range of mechanical services and a five year facilities management contract with ExxonMobil in Qatar. We also secured a three year extension to our longstanding logistics and oilfield services contract with Occidental Petroleum in Oman. Other contract wins included two mechanical services contracts with the UAE military, consultancy work for Dubai's Roads and Transport authority and FM contracts for several schools and colleges in Qatar.

In Saudi Arabia we won contracts to manage services at the Information Technology and Communications Complex (ITCC) and King Abdullah Financial District in Riyadh. We are also encouraged by the prospects for our recently launched joint venture with the Rezayat Group (Interserve Rezayat) which will deliver facilities management services in Saudi Arabia. The addition of esg to the Group also creates a platform to extend front line services into Saudi Arabia, where we operate three further education colleges under the Colleges of Excellence programme, which complements our existing safety and management skills training activities in Qatar and Oman.

With our new businesses, TOCO and Adyard (each acquired during 2013 in Oman and the UAE, respectively) joining our longstanding Madina operations (based in Qatar) we have developed greater reach and capability across the oil and gas services sector in the Gulf region, opening up access to a wider pool of customers and pan-regional, as well as national, opportunities. TOCO and Adyard delivered strong work winning and started 2015 with record order books. Key new wins included contracts with ZADCO, NABORS, GASCO, Hyundai Engineering & Construction Co.,Asia Gulf Power Service, TAPCO, Gulf Petrochemical Services and Enerflex.

CONSTRUCTION

We offer design, development, 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 enduring relationships with clients and to combine our international experience with our partners' local knowledge to deliver outstanding service.

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

UK

Against a backdrop of improving demand but also of increasing supply chain pressures, we performed well, growing revenue 21 per cent to £970.7 million. This growth was boosted by a strong performance from Paragon, the London-based specialist fit-out and refurbishment business we acquired in 2013, and by our growing Energy from Waste (EfW) activities. It also reflects a robust performance from our traditional regional building activities. Operating profit rose to £15.4 million at a margin of 1.6 per cent.

Future workload grew 39 per cent to £1.4 billion (FY2013: £1.0 billion), benefitting from our successful targeting of a mixture of new and existing frameworks, and from selective opportunities in the private sector.

We made further progress in the EfW market, entering (in joint venture with Shanks Group plc) into an agreement with Derby City and Derbyshire County Councils to build and operate a new waste treatment facility in the city under a 27 year, £950 million Public Private Partnership (PPP) contract. This contract adds to a pipeline of EfW projects that we already have underway in Glasgow, Peterborough, Rotherham and East Lothian (signed in early 2015) together with a number of other opportunities in this growing sector.

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

In education, we were confirmed as preferred bidder in the Priority School Building Programme to develop seven secondary schools across Hertfordshire, Luton and Reading. We also won contracts to build facilities for the universities in Birmingham, Southampton and Wolverhampton. These projects extend our track record in this sector where we have now completed the construction of over 50 educational facilities.

We won significant work in the health sector during the year, including contracts to design and build a high energy proton beam cancer therapy facility for the Christie NHS Foundation Trust in Manchester and a centre of excellence for the Scottish National Blood Transfusion Service in Edinburgh.

During the year we were awarded a place on the Highways Agency's four year, £5 billion collaborative delivery framework schemes valued between £25 million and £50 million, which will provide us with opportunities on a large programme of infrastructure investment over the coming years.

Our credentials in building advanced production testing facilities were reinforced through a number of new awards, such as for a research and assembly plant - Factory 2050 - at the University of Sheffield's Advanced Manufacturing Research Centre. This was further reinforced by the award of a contract to build an advanced experimental station and electron microscopy facility at Diamond Light Source on the Harwell Oxford Campus in Oxfordshire.

Combining our project finance and construction skills, we secured two further major city development schemes featuring a range of retail and leisure clients: a project to develop and build a 150-room Premier Inn hotel in Torphichen Street in central Edinburgh and the development of a mixed-use project on the site of the former Co-op building in Newcastle city centre.

Paragon continues to thrive, benefiting from both a buoyant London office fit-out market, and from the additional client base and balance sheet strength provided by the Group since acquisition. Since becoming part of Interserve, Paragon has won more than £160 million of new work, including contracts to fit-out three floors of Markel Insurance's Fenchurch Street offices and BMW's UK headquarters in Farnborough.

In July we were delighted to be named Contractor of the Year by industry journal Construction News, highlighting our leading position within the UK construction market and the excellent teamwork demonstrated by our people.

International

International Construction performed as expected in challenging, albeit slowly improving markets, in which competition remains high. Volumes increased slightly on a constant currency basis (up 1 per cent) and strong work winning led to growth in the order book of 37 per cent at the year end compared to the end of 2013.

Key contract wins in the UAE included work with Halliburton, DP World, the UAE Roads and Transport Authority, Meraas and the RIVA Group. We completed work on 'The Beach' retail and entertainment village and started work on the £110 million redevelopment, expansion and upgrade of the Mall of the Emirates, on behalf of long-standing client, Majid Al Futtaim. 

In Qatar we were awarded a £323 million contract, in joint venture, to build Doha Festival City, which will be Qatar's largest retail and entertainment development. We also won work on the Msheireb Heart of Doha redevelopment and a project to build a central energy plant at Education City for the Qatar Foundation.

In Oman, contract wins included the civil engineering works for the expansion of the Sohar refinery for Petrofac/Daelim and an extension to the Muscat City Centre mall for Majid Al Futtaim. We further developed our power and water portfolio by winning the civil engineering works to a seawater reverse osmosis plant in Barka for Osmoflo.

EQUIPMENT SERVICES

Equipment Services operates globally, designing, hiring and selling formwork and falsework solutions for use in infrastructure and building projects. Our activities have a broad geographic spread, the mix of which can change quickly, hence we manage our equipment fleet globally, thereby combining our scale and expertise with agility and responsiveness to meet customers' needs.

Performance in the period was strong, increasing profit by 32 per cent to £26.6 million (FY 2013: £20.1 million) with operating margins gaining 170 basis points as this operationally-geared business benefitted from increased activity in global infrastructure markets and from the significant  investment we have made over the last two years to facilitate growth.

We further extended our reach during the year, opening new branches in South Africa (Cape Town and Nelspruit), the United States (San Leandro, California) and Panama (Panama City) but also downsized in weaker markets, such as Australia, relocating our fleet to exploit opportunities and keeping our cost base responsive to demand fluctuations.

Middle East and Africa

We continue to see strong growth in the Middle East, benefiting from increased demand in the UAE, with business confidence growing in Dubai and ongoing work on large projects including the Midfield Terminal project at Abu Dhabi airport. We are well positioned to take advantage of opportunities in Qatar as new large-scale infrastructure projects gear up, while Oman has also seen a significant increase in demand, boosted by projects such as the Nizwa Mosque, which was completed during the period. After very strong levels of demand in 2013 our activity in Saudi Arabia continued to grow, boosted by significant new contract wins, including work to supply a new transportation complex being built in Mecca and early wins on major projects such as the King Abdullah Financial District and Riyadh metro.

Asia-Pacific

Demand continued to weaken gradually in Australia, reflecting more subdued economic conditions emerging in the last 12-18 months and the completion of a number of major energy and mining projects in Western Australia.

Elsewhere in the Asia-Pacific region demand grew, with Hong Kong particularly buoyant due to a series of significant transport infrastructure projects including the Macau Bridge and West Kowloon Rail Terminus. We traded strongly in New Zealand through a broad base of projects across both the North and South islands. We also performed well in the Philippines, in both the commercial and power sectors, helped by new contracts including the Davao power plant: a project that should stand us in good stead to benefit from further investment in the sector.

Europe

We performed very well in the UK, benefitting from our role in the development of a leisure and entertainment complex being built near Birmingham and from work on sizeable rail improvement projects in Reading and on the Stockley Viaduct project near Heathrow airport. Other notable contract wins include work on Scotland's new Forth Bridge and the bridge deck to support the Friargate development in Coventry, while our Ascent-s Safety Screen was used on a number of new high-rise developments.

The market remained slow across much of mainland Europe. We took further action on our cost base in Ireland and Spain reflecting persistent weakness in domestic demand, but also made further progress in developing export opportunities, in particular to other Spanish-speaking markets, such as Panama and Colombia.

Americas

We operate in the USA, Colombia, Panama, Chile and export into Peru. The recovery in the US construction market has been somewhat slower than anticipated and government investment remains sluggish. However, our expansion in California is now bearing fruit, with ongoing work on a number of sizeable commercial developments in the Bay Area and downtown San Francisco. We continued our expansion in Latin America, by developing and investing in our businesses in Colombia and Panama. Performance in Chile was subdued due in large part to low copper prices suppressing general economic activity.

INVESTMENTS

Investments leads the Group's project-investment activities and manages our equity investments both in Public Private Partnership (PPP) and private sector projects.

Our strategy includes combining our investment, development and project management skills to finance and deliver projects over many years. In recent years we have extended this from our core PFI activities into selective private sector commercial developments and now have an aggregate portfolio (invested and committed) of £47 million.

Having achieved a number of financing and planning milestones, we started work in February 2014 on the Haymarket development in central Edinburgh, which will become one of the city's largest mixed-use commercial developments. During the year we also invested in projects to redevelop the Alder Hey Children's Hospital and a centre of excellence for the Scottish National Blood Transfusion Service in Edinburgh.

We were appointed preferred bidder to finance, design, build and provide FM services for seven secondary schools across Hertfordshire, Luton and Reading, the first batch to be procured under the Priority School Building Programme, part of the government's PF2 initiative.

Our presence in Yorkshire has grown significantly in recent years and during the year we completed work on the last of three major developments for West Yorkshire Police to provide a modern working environment for over 1,000 police officers and civilian staff, built to the highest energy and sustainability standards.

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 2014 were £25.2 million (FY 2013: £22.1 million), accommodating an increased 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 ensure that we continue to scale our support and assurance functions appropriately with the growth of our operational businesses.

Outlook

Against a backdrop of uncertainty in many of our markets, we remain confident in our strategy of managing and diversifying risk and focussing our resources on markets with strong long-term growth drivers. Our attractive positioning in our core markets and our ability to identify, invest in and deliver on attractive project and corporate opportunities is a powerful differentiator.

We expect our Support Services business to make further progress as we continue to win new work and extend relationships with existing clients. Our increased private sector exposure should act as a counterweight to any temporary hiatus in further government outsourcing, which we expect to resume and accelerate after the UK General Election, with particular emphasis on frontline public services. We believe that the spread of our activities in the Middle East support services market will mitigate against the potential impact of continued weakness in the oil price during 2015.

In Construction we expect to see further volume growth in the UK in 2015, much of which is visible in our future workload, although margins will likely remain close to current levels. In the Middle East we expect to make volume progress as we deliver contracted orders and continue to pursue opportunities across various sectors.

We expect Equipment Services to continue to grow in expanding global construction markets and to benefit from further operational gearing.

While optimistic, we continue to manage the business prudently to ensure it remains resilient against future economic cycles.

STRATEGIC REPORT

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. 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

Summary

Financial highlights of 2014 included:

· A strong trading performance with Revenue up 33 per cent (10 per cent organic) and Total Operating Profit up 35 per cent (9 per cent organic)

· Increase in Headline Earnings Per Share of 23 per cent

· Investment of £271.4 million in acquisitions to broaden our UK FM footprint (Initial Facilities) and enhance our skills and Welfare to Work expertise (esg).

· Further strengthening the balance sheet for the long term by:

· Enhancing our debt facilities with a 10 year $350 million US private placement and extension of our existing bank facilities to 2019.

· Completing a pension buy-in transaction for c35 per cent of the liabilities of the Interserve Pension Scheme.

· Further investment for growth in capex and working capital.

Financial performance

Revenue and operating profit

Consolidated revenues increased by 33 per cent compared with 2013, and total gross revenues (including our share of joint ventures and associates) by 28 per cent.

UK Support Services, boosted by the March acquisition of Initial Facilities, delivered a strong performance with a 40 per cent increase in revenues (3 per cent organic). The International Support Services division revenues also increased sharply to £157.2 million as we continued the integration of our regional services offering and benefitted from a full year contribution of Adyard. The upturn in UK Construction market activity levels and a strong performance by our Paragon fit-out business helped drive an increase in revenues of 21 per cent (18 per cent organic). Middle East construction markets remained resilient with 1% revenue growth on a constant currency basis. Equipment Services benefitted from further investment and generally improving markets to show revenue growth of 15 per cent.

Full-year operating margin of 4.0 per cent (2013: 4.0 per cent) reflects a number of differing trends within divisions. Support Services UK delivered an operating margin of 4.8 per cent, a slight improvement on the 2013 outturn of 4.7 per cent. International Support Services made further progress with margins rising to 4.8 per cent (2013: 4.4 per cent). UK Construction margins fell to 1.6 per cent (2013: 1.8 per cent), remaining within our guided range but reflecting the supply chain pressures currently present within the market. Margins in our International Construction operations held up well in difficult markets, declining slightly to 4.7 per cent (2013: 5.1 per cent). Market conditions and tender opportunities are generally improved from 2013 but markets remain tight. Equipment Services continued to show the benefits of a high operational gearing as margins rose further to 13.6 per cent (2013: 11.9 per cent).

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

At 2013 average rates the Group would have generated an additional £2.3m of Total Operating Profit.

Investment revenue and finance costs

The net interest charge for the year of £11.0 million can be analysed as follows:

Driven predominantly by the acquisition of Initial, the average net debt for the year was £240.8 million (2013: £14.9 million) and this increase can be seen in the higher net interest charge on Group debt. Allowing for the timing of the payment of the consideration for Initial, there was no material difference between average and year end net debt levels.

Interest receivable on sub-debt increased slightly to £0.8 million (2013: £0.6 million) reflecting the return on our continuing PFI investments.

The improved pension deficit position resulted in a pension finance credit of £0.3 million (2013: £1.4 million charge).

Taxation

The tax charge for the year of £12.0 million represents an effective rate of 19.4 per cent on total Group profit before taxation, broadly unchanged from 2013. 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 reduction in the Group companies' rate is predominantly driven by the 2 per cent fall in the UK corporation tax rate during 2014, together with an increased proportion of overseas profits arising in lower tax jurisdictions.

Profit before tax of £61.9 million (2013: £68.1 million) is lower than the previous year due to increased exceptional costs and amortisation, both principally driven by the acquisition of Initial Facilities.

Dividend

The directors recommend a final dividend for the year of 15.5 pence, to bring the total for the year to 23.0 pence, an increase of 7.0 per cent over last year. This dividend is covered 2.6x times by Headline earnings per share.

Net debt and cash flow

Net debt has increased to £268.9 million (2013: £38.6 million), reflecting our continuing investments in acquisitions (2014: £168.5 million net of share issue), net capital expenditure (2014: £54.3 million) and working capital (2014: £53.3 million).

The operating cash flow of £23.5 million (2013: £41.9 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 and seen in our half year results. Our rolling 3 year gross operating cash conversion is 61.7 per cent (2013 : 92.1 per cent). This compares to our target of 100% and is impacted by a period of investment in growth.

The net working capital outflow of £53.3 million (2013: £19.7m outflow) reflects both the growth of the business, particularly in Equipment Services, and continued pressures on payment terms, particularly in UK Construction.

Capital expenditure increased significantly to £54.3 million (2013: £33.7 million). This reflects investment in the Equipment Services fleet to enable us benefit from improving markets, and further investment in our back office and client facing assets in UK Support Services.

Despite tight trading conditions in the Middle East our remitted dividends of £17.8 million were in excess of the profits earned (£15.1 million).

Tax paid of £10.1 million (2013: £5.7 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 £10.1 million (2013: £10.6 million) reflects our increasing investments in property development schemes, principally Haymarket.

Acquisitions net outflow of £243.7 million in 2014 represents the net consideration for the acquisitions of Initial Facilities and esg.

Other non recurring costs of £19.7 million mostly relate to the exceptional charges for the acquisition and integration of Initial (£18.4 million).

Acquisitions

On 18 March 2014 we acquired 100% of the facilities services business ("Initial Facilities") of Rentokil Initial Plc, for a cash consideration of £245.7 million. The acquisition strengthens our Support Services offering, allowing the provision of a significantly enhanced service offering. The enlarged business offers a full range of services across all contract sizes, evenly split between public- and private-sector customers. The post-acquisition review of fair values identified acquired net assets of £105.4 million including £87.8 million of intangible assets, predominantly representing customer relationships. These acquired assets will be amortised over periods up to 5 years. £140.3 million has been recognised as goodwill.

On 5 December 2014 we acquired esg, a training and skills business. The acquisition boosts our skills offering in the UK and Middle East. Total cash consideration was £25.7 million. The review of fair values identified acquired net assets of £13.8 million including £19.1 million of acquired intangible assets, representing customer relationships. These acquired assets will be amortised over periods up to 5 years. The balance of £11.9 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 2014 the Group pension deficit under IAS 19, net of deferred tax, has decreased slightly to £3.8 million (2013: £5.9 million):

On 1 August 2014 we made further substantive progress with our ongoing plan to reduce risk in our pension scheme by entering into a buy-in transaction with Aviva Plc. This buy-in contract protects the Group from risks associated with approximately 35 per cent of the Scheme's defined benefit liabilities.

This de-risking has proved its worth in period by allowing us to reduce the risk of asset underperformance. If the transaction had not been entered into and the assets instead invested in the FTSE100 the net deficit would have been approx. £35 million higher at year end.

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 most recent completed triennial actuarial valuation of the Scheme was as at 31 December 2011 which set the annual recovery payments at £12 million per annum, indexed each year, until 2019. A new triennial valuation process, based on the position as at 31 December 2014, has now commenced.

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 2014, 48 per cent of the Scheme assets were invested in performance-seeking assets (2013: 49 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.

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.

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.

Following the acquisition of Initial Facilities, and the resulting step change in group debt, we have put in place a $350 million US Private placement. These loan instruments have a weighted average maturity of mid 2024 and are fully hedged into a fixed interest rate sterling amount. Additionally we have access to committed revolving bank facilities totalling £250 million, which were extended during the year until February 2019.

Our aggregate finance facilities therefore stand at c£450 million with £250 million of this available until February 2019 and the remainder available on average until mid 2024.

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 FX 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 7 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.

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 2013 consolidated financial statements, has led to an increase in consolidated net assets of £12.8 million (2013: £13.0 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 and Governance sections. 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 c£450 million until a range of dates that extend beyond at least February 2019. 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 2014

Consolidated statement of comprehensive income

For the year ended 31 December 2014

Consolidated balance sheet

At 31 December 2014

Consolidated statement of changes in equity

On 5 March 2014, 12,897,771 ordinary shares were issued and placed at a price of 580p per share. The net proceeds after costs were £73.7 million. The placing utilised a structure, whereby a special purpose entity issued redeemable preference shares in consideration for the receipt of the cash proceeds (net of issue costs) arising from the placing. The Company's ordinary shares were issued as consideration for the transfer to it of the shares, which it did not already own, in the special purpose entity. As a result, in the opinion of the Directors, the placing qualified for merger relief under section 612 of Companies Act 2006 so that the £72.4 million excess of the value of the acquired shares in the special purpose entity over the nominal value of the ordinary shares issued by the Company was credited to the Company's Merger reserve.

(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 during the period.

(2) The hedging and revaluation reserve includes £27.6 million relating to the revaluation of available for sale financial assets within the joint ventures (2013: £6.5 million).

(3) 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 Trusts. The market value of these shares at 31 December 2014 was £4.8 million (2013: £5.3 million).

Consolidated cash flow statement

For the year ended 31 December 2014

Notes to the Consolidated Financial Statements

For the year ended 31 December 2014

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 26 February 2015, does not constitute the Company's statutory financial statements for the years ended 31 December 2014 or 2013 but is derived from these accounts.

Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 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 2015.

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 2013 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 2014.

3. Business and geographical segments

The Group is organised into four 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.

· 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 2014

Business segments