Interserve Regulatory News (IRV)

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 Interserve PLC Full Year Results Announcement 2018

27 February 2019

Interserve, the international support services, construction and equipment services group, today announces its unaudited financial and operational results for the year ended 31 December 2018.

*1 before non-underlying items and amortisation of acquired intangible assets.

*2 2017 Restated for exited businesses from £74.9m to £84.5m

Deleveraging Plan to secure long-term future of Interserve

· Prospectus to be issued on the date of this announcement, setting out the Deleveraging Plan in detail

· The Directors believe the proposed Deleveraging Plan will provide the Group with sufficient liquidity to service its short-term cash obligations, create a strong and competitive balance sheet and a fundamentally solid foundation from which the Group can improve its business and deliver on its long-term strategy

· The Deleveraging Plan is a consensual restructuring of Interserve, which is required to provide sufficient liquidity, cash and bonding facilities to allow the Group to service short term obligations to avoid a default in the Existing Financing Arrangements. Such a default, were it to occur, would be expected to have material adverse consequences for stakeholders and, in particular, for existing shareholders

· The Deleveraging Plan fully preserves the pre-emption rights of existing shareholders. If they take up their entitlements in the equity raise their ownership will not be diluted and they will participate on the same terms as lenders

· The Deleveraging Plan will be subject to approval by Interserve's shareholders on 15 March 2019

Financial performance

· Significant operating profit *1 improvement up 9.7 % to £92.7m (2017: £84.5m)

· Loss before tax reduced from £244.4m to £111.3m

· Revenues declined 10.7% to £2,904.0m (2017: £3,250.8m) due to a fall in UK Construction and a more disciplined and commercially focused Group-wide bidding process

· Operating profit margin *1 increased by 23% from 2.6% to 3.2%

· The 'Fit for Growth' programme is delivering material cost savings and improving efficiency and effectiveness across the Group. The programme delivered £20m of savings in 2018 and is on track to deliver at least £40-50m in annual savings by 2021

· Net debt increased to £631.2m within the expected range of £625-650m, primarily driven by:

o incremental cash costs from Energy from Waste contracts;

o incremental exceptional costs on a number of Construction projects;

o delays in collecting receipts from certain Middle Eastern customers;

o an unwind in the UK Construction business working capital as the division's revenue continued to decline, partly due to the Group's disciplined approach to pursuing work but more so as the Group's financial position started to impact its ability to successfully win contracts, this has accelerated in the first half of 2019.

Transformation programme delivering strong operational progress and strategic momentum

· The Group's Health and Safety performance improved in the year with our Lost Time Incident Rate falling by 25% to 0.98 in 2018

· Future workload of £7.1bn (December 2017: £7.6bn), with steady momentum particularly in Support Services Defence, Healthcare and Regulated Sectors

· Operating profit in Support Services increased by 38.9% from £42.2m to £58.6m as a result of a multi-year operational improvement plan

· In 2018, UK Construction secured access to Government framework pipeline sales opportunity of £1.0bn

· International Construction business secured a number of contract wins in the period particularly in the UAE

· Equipment Services revenue lower as major UK infrastructure projects not repeated in 2018 and impact of Qatar embargo; strengthened competitive position through roll-out of new product ranges

· Continued progress on closing out remaining Energy from Waste projects

Debbie White, Chief Executive Officer, Interserve plc said:

"Despite extremely challenging circumstances, Interserve has made significant progress in 2018. Following the successful completion of the refinancing in April 2018, the business has traded robustly in some difficult markets and continued to win significant new contracts. The 'Fit for Growth' programme is delivering material cost savings and a simpler and more effective business structure. The implementation of the Group's strategy remains on track and we have delivered a significantly improved operating profit this year in line with our plan.

Interserve remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us. However, the Group remains over-leveraged and the successful implementation of the Deleveraging Plan is critical to our future, as it will ensure that Interserve has a competitive financial structure for its future growth. I would urge our shareholders to vote in favour of the Deleveraging Plan.

Interserve has significant opportunities as a best-in-class partner to the public and private sector, and we are making good progress putting in place the right services, governance and financing to deliver a stronger future for our customers and our 68,000 people."

Interserve will be holding a webcast presentation for analysts and investors with Debbie White, CEO, and Mark Whiteling, CFO, at 09.15 GMT, which can be accessed at: https://3xscreen.videosync.fi/2019-02-25-interserve-fy-results-2018

 Participant dial in numbers:Dial in: 0800 358 9473Participant Access Code: 42379575#International participants can check the correct international dial in codes here.The replay of the webcast will be available after the event at: www.interserve.com

ENDS

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION RELATING TO INTERSERVE PLC.

LEI: 549300MVYY4EZCRFHZ09

For further information please contact:

Jonathan Refoy +44 (0) 7880 315877Interserve plc

Martin Robinson +44 (0) 207 3534200Toby BatesLisa Jarrett-KerrTulchan Communications

About InterserveInterserve is one of the world's foremost support services and construction companies. Everything we do is shaped by our core values. We are 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 FTSE-listed. We have consolidated revenues of £2.9bn and a workforce of circa 68,000 people worldwide.

www.interserve.com

For news follow @interservenews 

CHAIRMAN'S STATEMENT

My comments will cover the previous fiscal year and the first few months of 2019 in view of the significant events which have taken place in that period. The period has been the most difficult in Interserve's history since the Group was established in 1884.

The resulting stress and uncertainty have led to anxiety amongst our staff, suppliers and customers and significant loss of value for our shareholders from the fall in our share price. I would like to thank them for their support during this challenging period.

Interserve remains one of the world's foremost support services, construction and equipment companies delivering a range of services for our clients helping them to improve their efficiency and productivity. It is a business with a strong purpose, providing important and valued services that enhance people's lives on a daily basis.

However, over the years, the business lost its operating and financial discipline, became too federated and inefficient, lacked a coherent approach and entered some businesses it shouldn't have done.

Debbie White and her management team have made excellent progress over the last eighteen months addressing the problems. The proposed Deleveraging Plan and the continuing progress of the 'Fit for Growth' programme are significant steps towards restoring stability, future financial success and underlying resilience in Interserve and to rebuilding trust with all our stakeholders. I comment on each of these points in more detail below.

DELEVERAGING PLAN

The Board believes the Deleveraging Plan will provide Interserve with a strong balance sheet and the platform to deliver on its strategy. Agreeing the key commercial terms of the Deleveraging Plan with our lenders, bonding providers and Pension Trustee was a significant step forward in our plans to strengthen the balance sheet. The Board believes that this agreement will secure a strong future for Interserve. This proposal has been achieved following a long period of intensive negotiation and has the support of our financial stakeholders and UK Government. The Deleveraging Plan is subject to approval by Interserve's shareholders.

Its successful implementation is critical to the Interserve Group's future and all of its stakeholders and without its successful implementation there will be significant disruption to the business.

The Deleveraging Plan will, alongside our 'Fit for Growth' programme, place us in a strong position to deliver our strategy, be competitive in the marketplace and provide a secure future for the Interserve Group's employees, customers and suppliers and the Board recommends that shareholders vote in favour of it.

FINANCIAL PERFORMANCE

The business has traded robustly in some challenging markets and continued to win significant new contracts. This has been achieved in an environment which is challenging for the sector and particularly so for Interserve. The 'Fit for Growth' programme is delivering material cost savings and a simpler and more effective business structure.

The Board remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us, particularly in closing out and exiting the Energy from Waste business. It also means reducing debt and putting a strong long-term capital structure in place through the proposed Deleveraging Plan.

MANAGEMENT CHANGES

There were three senior management changes in the year, with the departure of Robin O'Kelly, Director of Communications, Yvonne Thomas, Managing Director Citizen Services and Gordon Kew, UK Construction Director.

BOARD AND GOVERNANCE

The Company now runs through clear business structures and accountabilities in its three operating divisions: Support Services, Construction and Equipment Services. 

Following the departure of Keith Ludeman from the Board in May, Nick Salmon has taken on the chairmanship of the Remuneration Committee. We also welcomed Nicholas Pollard as a Non-Executive Director to the Board in June. Dougie Sutherland has also left the Board in February 2019.

OUR PEOPLE

I have highlighted the challenges that the leadership team have faced in recent months, but inevitably the impact of those changes has been felt by people throughout the business. These are difficult times for the Company and the sectors it operates in. Dealing with these challenges will necessitate changes for all staff. Across Interserve, our people have shown great resilience and loyalty. They have embraced the need for change and I thank them for this and their continued support.

LOOKING AHEAD

Following the challenges of 2017, this year has been about creating a stable platform for the future growth of the Group. Major progress has been made, but we recognise there is still much to do, and the leadership remain focussed on the job in hand.

The successful handover of all its remaining Energy from Waste projects remains a core priority for the Group.

The proposed Deleveraging plan will, if implemented, restore financial resilience to our balance sheet, but the process of rebuilding trust with, and value for, our shareholders is just beginning.

Once again, I would like to thank our staff, customers and suppliers for their support during this difficult period. I would also like to express my appreciation to those shareholders and lenders who have continued to support us.

Glyn Barker, Chairman

CHIEF EXECUTIVE OFFICER'S STATEMENT

Throughout 2018 and the early months of 2019 it has been an extremely difficult time for Interserve and the Group has faced an unprecedented level of challenges. However, it has also been a period of considerable progress. The Group has benefited enormously from its hard-working employees who are our greatest source of competitive advantage, the depth of our client relationships, the underlying business strategy, and the strong support of our stakeholders.

Our most important priority remains the health and safety of our employees. I am pleased to say the Group's performance improved in the year. While there will always be more that can be achieved through ongoing actions, our Lost Time Incident Rate improved by 25% falling to 0.98 in 2018.

Whilst the majority of my first eighteen months as Chief Executive Officer has been spent establishing the long-term financial stability of the Group, I have had the opportunity to spend time visiting our UK and international operations. There is a lot to be excited about: It is very clear we have extremely strong delivery capability and client relationships. Interserve has significant opportunities as a best-in-class partner to the public and private sector, and we are working with all stakeholders to put in place the right standards, services, governance and financing to deliver a stronger future for Interserve's customers and our 68,000 people.

Progress on deleveraging plan

On 6 February 2019, Interserve announced that the key commercial terms of the proposed Deleveraging Plan, which the Directors believe will provide the Group with sufficient liquidity to service its short-term cash obligations, create a strong balance sheet and a competitive financial structure from which the Group can improve its business and deliver on its long-term strategy.

The Deleveraging Plan is a consensual restructuring of Interserve, which is urgently required to avoid a default in the existing financing arrangements and to provide sufficient liquidity, cash and bonding facilities to allow the Group to service short-term obligations and secure a stable platform. Such a default, were it to occur, would be expected to have material adverse consequences for all stakeholders and, in particular, for existing shareholders.

The Board considers the Deleveraging Plan to be in the best interests of the Group and its shareholders as a whole. The Deleveraging Plan preserves fully the pre-emption rights of existing shareholders. If shareholders take up their entitlements in the equity raise their ownership will not be diluted and they will participate on the same terms as lenders.

The Board believes that the Deleveraging Plan will secure a strong future for Interserve. This proposal has been achieved following a long period of intensive negotiation and has the support of our financial stakeholders and Government. Its successful implementation is critical to Interserve's future and all the Company's stakeholders. The Deleveraging Plan will, alongside our 'Fit for Growth' programme, place us in a strong position to deliver our strategy, be competitive in the marketplace and provide a secure future for the Interserve Group's employees, customers and suppliers.

The Deleveraging Plan will be subject to approval by Interserve's shareholders.

Building a better Interserve - strategic priorities

Strategic Review and Transformation Programme

In April 2018, Interserve announced that it had completed a Group-wide strategic review and launched a strategic plan, based on four priorities:

1. Fit for Growth - improving cost efficiency and effectiveness;

2. Strengthening Interserve's competitive value proposition;

3. Standardising operational delivery; and

4. Developing its people and a consistent, 'One Interserve' culture.

Progress against our four strategic priorities

Fit for Growth

The three phase 'Fit for Growth' programme was designed to ensure that the Group has the right strength, depth and level of resources to consistently win and consistently deliver services for our customers. The programme is delivering material cost savings and a simpler and more effective business and operating structure. The programme over delivered its target of £15m savings by 33% to £20m in 2018 and is on track to deliver at least £40-50m annual benefit to Group performance by 2021.

Phases one and two of the programme have now been successfully completed. An initial cost-out programme was undertaken in late 2017 and a Group-wide organisational design project was implemented in 2018 and completed in early 2019. In addition, Interserve has focused on improving governance, key processes and efficiency across the Group.

Phase three of the programme is about continuing to deliver on our promises to achieve our savings targets for both cash and the P&L. Key objectives include simplifying our technology, standards and processes to improve efficiency as well as driving one way of doing things across Interserve. Improving the performance of our business and our culture remains a key priority across the Group.

Competitive Value Proposition

The Group's second strategic priority is to have competitive customer value propositions in each of the markets the Group chooses to operate in. A key component of a competitive value proposition is the strength of our balance sheet, our proposed Deleveraging Plan will deliver us this.

Interserve is focused on bringing the depth of our expertise and knowledge to its customers, enabling them to deliver strategic goals. We have made progress toward achieving this objective, such as in Support Services developing our customer experience proposition to ensure we add value for our customers and in the interchange model we have developed to improve how our rehabilitative companies support our service users, but we also realise that more needs to be done. There will be a greater focus on where these propositions best meet the needs of Interserve's customers; a major aspect of this approach is the deepening of relationships with our clients. We are moving away from our traditional reliance on single-service operations to the provision of a broader, deeper span of services which have an emphasis on the formation of long-term relationships.

Operational Delivery

In order to achieve this within Support Services, Interserve has successfully reorganised its business teams to align to the four focus segments of Government and Defence, Private Sector, Communities and Citizen Services. The Group has also completed a review of its service offerings to ensure that they are appropriate for these customer segments and that it is best positioned to offer and deliver consistent integrated facilities management services. Interserve has started to wind down service offerings that are not core to its future offering and will continue to do this proactively and as contracts end. In UK Construction we have developed a focused approach to the market which will be rolled out during 2019.

One Interserve

Our 'Fit for Growth' programme involves creating a One Interserve culture. The aim of One Interserve is to enable our colleagues to work and collaborate together to deliver better services for our customers.

One Interserve addresses the fact that historically Interserve was fragmented and federalised, which frustrated the business's ability to develop and realise opportunities for growth. Unlocking these aspects and building a common company culture is our fourth strategic priority and will enable Interserve to bring the very best of the Group's capabilities and service expertise to customers in its three sectors. A key component of the culture will be strong governance and accountability.

The plan includes a focus on the self-delivery of services - which is an important part of margin development and control.

A final aspect of One Interserve involves following a standard approach to leadership, to performance management, to training and development and to reward and recognition in order to streamline the business and ensure we are in the best possible shape to serve our customers.

The key to the delivery of the strategy and the business plan is Interserve's people. Our most recent staff survey elicited a strong and positive engagement score of 72 per cent. More than 78 per cent of our colleagues said that their manager cared about them, while almost 80 per cent said that what they do matters. Action planning around feedback is helping us drive continuous improvement.

2018 financial results

Despite challenging market conditions, the Directors believe that Interserve has made significant operational progress in 2018. Following the successful completion of the refinancing in April, the business has traded robustly in some challenging markets and continued to win significant new contracts. The 'Fit for Growth' programme is delivering material cost savings and a simpler and more effective business structure.

The implementation of the Group's strategy remains on track and we have delivered a significantly improved operating profit up 9.7% to £92.7m, driven by cost savings and increased margins. Net debt increased to £631.2m and was within the expected range of £625-650m as revised in November. This was driven by UK Construction, Energy from Waste outflows, non-underlying charges and delayed payments on certain Middle East projects.

Since 31 December 2018 the Group's net debt position has increased, partly in line with expected seasonality, but also as a consequence of the recognition of costs associated with the deleveraging transaction, a further deterioration in the Middle East relating to receivables for Support Services and RMDK and further working capital unwind in the construction business, which in aggregate represent a deterioration of approximately £107m above the expected increase in net debt due to seasonality. These items as well as an updated expectation with respect to the Energy from Waste projects have driven the requirement for new liquidity within the Group and the lenders agreeing to provide a further facility of £110m as part of the Deleveraging Plan. If the Deleveraging Plan is not passed on 15 March 2019, the Group will have an immediate working capital shortfall, regardless of whether the Lenders have demanded the repayment of the Group's borrowings under the Existing Cash Financing Arrangements.

Our transformation programme is delivering strong operational momentum. The Group has a future workload of £7.1bn as of 31 December 2018, with steady growth particularly in Support Services.

The Board remains focused on positioning the Group for long-term, sustainable success. This means continuing the operational progress we are making to put legacy issues behind us, particularly in closing out and exiting the Energy from Waste business.

The Group remains over-leveraged and the successful implementation of the Deleveraging Plan is critical to our future.

The Board considers the Deleveraging Plan to be in the best interests of Interserve and will preserve maximum value for employees, pensioners, lenders, suppliers, customers and shareholders. Alongside the company-wide 'Fit for Growth' programme, it will provide a strong platform for Interserve's future growth.

Contract wins

Despite challenging market conditions and concerns arising out of our financial condition, we still continued to make progress winning new work in the year. In our Support Services division we secured the following contracts: AENA (£37m), King George Hospital (£35m), Ministry of Justice (£25m) and the Foreign and Commonwealth Office (£67m), among others. In our Construction division major contracts included: Durham University (£78m), Liverpool Women's NHS Foundation Trust (£15m) and Prince Charles Hospital, Merthyr (£25m). In our Equipment Services division, contract wins included: Royal Atlantis Residences in Dubai (£5m) and the Las Vegas Raiders Stadium (£1.2m).

Divisional performance

Considerable work has been put into focusing Interserve's core capabilities to create value for its customers. Following the strategic review in 2018, the Company completed the streamlining of its divisional structure from more than 40 to three divisions in December 2018, replacing the federated entity that existed up until the end of 2017. This reorganisation is helping us to be leaner and better aligned to our customers, increasing leadership accountability and importantly making Interserve even more competitive.

Support Services

Support Services UK delivered a robust performance over the year as it continued to implement the 'Fit for Growth' programme and had excellent client retention in the UK. A decrease in revenue was counterbalanced by increased margins and profits. This included leveraging the Group wide back office systems and processes, implementing a clearly defined market strategy leading to the divestment of non-core operations, exiting poorly performing market sectors, increasing self-delivery, and laying the foundations for greater operational standardisation across the business. As we outlined in our 2017 Annual report we have focused on cost reduction and stronger discipline on contract management governance helping us realise the benefits in 2018 and ensuring we enter 2019 with a solid platform for growth. Revenue increased in target sectors following key contract retentions, organic contract growth, and successful delivery of key contract mobilisations. Interserve's international support services business was negatively impacted by a debtor balance of £36m by one of its clients.

Construction

2018 was a challenging year for our UK construction business with a decrease in revenues being counterbalanced by higher margins. Progress has been made in closing out some complex projects and legacy accounts. We have successfully exited the London Construction market as part of our strategy to focus on our core sectors. Our regional building business, infrastructure business and engineering services business all made solid returns, which resulted in a return to profit for the division.

We continue to focus on core sectors and activities and ensure that the risk profile of work that we take on is commensurate with levels of return. Revenue is expected to fall in 2019 as some of the larger legacy contracts complete and due to some of the wider financial challenges the Group faced in 2018. Whilst we expect the division to be a smaller business by revenue in 2019, we believe it will be one which is more agile and capable of consistent profit margins in line with industry norms going forward.

Whilst the order book for the International construction business, particularly in Qatar, continues to be lower than expected, the business secured a number of contract wins in the period, particularly in the UAE where a strengthened oil price provides a more favourable backdrop for this competitive market.

Equipment Services

Challenging market conditions in several of our core markets through 2018 as well as supply chain challenges have slowed our overall rate of growth. Through 2018 we have seen the UK construction sector hit by the uncertainty of the Brexit talks with the consequence of investment and work on major infrastructure projects being delayed. RMDK remains a highly profitable business and has strengthened its competitive position during the period with the roll-out of new product ranges in the UK.

Energy from Waste

Interserve is continuing to pursue its strategy to exit from unprofitable businesses as rapidly as possible. The construction of all of our Energy from Waste projects was substantially completed during 2018, but while the Company expects to fully exit its Energy from Waste business during the first half of 2019, significant uncertainty remains on the timing of those remaining projects.

Interserve continues to expect to benefit from significant further insurance proceeds arising from these projects in 2019. The receipt of further insurance income remains a key focus for the Group.

Outlook

Interserve's ability to deliver its strategy and business plan, will be significantly influenced by our ability to successfully implement the Deleveraging Plan, thereby providing it with sufficient liquidity and giving it a foundation for financial stability.

Interserve will continue to implement its multi-year 'Fit for Growth' programme and 2019 will be the second year of the overall transformation programme. This will be a transitional year for the three operational divisions as Interserve continues to focus on exiting non-core areas and implementing the Group's cost and efficiency programme.

This year, through the outstanding expertise of our people, we will continue to deliver projects safely and ensure that we are best placed to serve our customers. The significant improvements we have made as part of our 'Fit for Growth' programme will ensure we continue to make progress in 2019 with the transformation of Interserve.

Debbie White, Chief Executive Officer

STRATEGIC REPORTOPERATIONAL REVIEW

The Operational Review refers to a number of alternative performance metrics; it is considered that these better reflect the underlying performance of the business. See note 16 for the basis of calculation. Additional disclosure is made in the Financial Review of non-underlying items and why the Directors believe it is appropriate to exclude these in considering operating performance. Certain comparatives are restated within these statements (see note 4).

Support services

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

These figures exclude non-underlying items

1 Including share of associates.

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

3 Future 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 robust performance successfully delivering its plans for Fit for Growth, leveraging the Group wide back office systems and processes, formulating and beginning the implementation of a clearly defined market strategy leading to the divestment of non-core operations, exiting poorly performing market sectors, increasing self-delivery and laying the foundations for operational standardisation across the business. As we outlined in our 2017 Annual report we have focused on cost reduction and stronger discipline on contract management governance helping us realise the benefits in 2018 and ensuring we enter 2019 on a sound platform for growth.

Revenue was £1,597.7m, following key contract retentions, organic contract growth, solid work winning and successful delivery of key contract mobilisations. We divested ourselves of our Industrial Access and Hard Services business and continued to successfully deliver our planned withdrawal from the High Street Retail market. We have concentrated our work winning strategy around large complex integrated service opportunities in our chosen market sectors and are seeing steady growth in our bid pipeline particularly in Defence, Healthcare and Regulated Sectors.

Savings of £20m were achieved through Fit for Growth - the three-year programme launched by the new management team in October 2017 focused on increasing the Group's organisational efficiency and increased ownership and accountability, improving Group-wide procurement processes and ensuring greater standardisation and simplification across the business. These actions contributed to a margin increase of 30 %.

The UK Government has been our largest customer for many years, and we continue to be one of its largest suppliers, retaining our pan European contract with the Foreign & Commonwealth Office which we have held for over ten years and successfully mobilising key new accounts such as the UK wide contracts for the Department for Works & Pensions, the Department for Transport and the Ministry of Justice. These new and retained accounts demonstrate the Government's ongoing faith in our ability to continue to mobilise and deliver large-scale contracts.

We had major wins in our other key market sectors including a large long term multi service contract with Barking, Havering & Redbridge University Hospitals Trust, a full facilities management contract with Westgate Shopping Alliance, a national facilities management contract for Thomas Cook and major extensions to our ongoing relationships with British Airways, Philipps 66/Pepsico and the Metropolitan Police amongst others.

Interserve's Citizen Services delivers vocational training, healthcare at home, probation services and support into employment in the UK and Saudi Arabia. Quality standards have remained high during 2018 with Interserve Learning and Employment, Healthcare and ILE International achieving "good" ratings from their respective inspectorates. Our Apprenticeship Levy business has achieved a forward order book of £35m, and in healthcare we retained a major client contract renewal against keen competition. In our Justice division, we renegotiated our probation contracts with the MOJ, and mobilised a new contract for prison industries in HMP Berwyn.

International

The oil price recovery earlier in the year has renewed enquiry levels particularly in the UAE (Abu Dhabi), however the political situation in Qatar has prevented this from improving activity levels in this market. We recorded reduced turnover because of the actions taken previously to right size the business and diversify into other industrial markets. As a result, the division delivered revenues of £172.1m and a profit of £7.2m.

With oil price levels above $60pb many of the oil companies have made firm commitments to field development and/or enhancements so the outlook is more promising.

Our Middle East facilities management businesses are now aligned with our UK Support Services teams and have begun working closely together to further develop our market strategies and capabilities, leveraging our UK expertise and ensuring consistently high standards of service delivery.

During 2018, we were pleased to secure a number of new awards including an integrated facilities management services contract for the prestigious five star Serenia Residences on the Palm, Jumeirah, technical maintenance services for the Qatar National Convention Centre and their National Theatre, together with a mobile maintenance service account for Alshaya, a leading retailer, for all of their retail stores in the UAE and Qatar.

We continue to enjoy strong sales pipeline opportunities in the UAE and KSA and remain optimistic that our focus on the region, increasing capabilities and customer satisfaction will lead to an ever increasing presence in the Middle East FM market.

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.

1 Excludes Exited Businesses

Challenging market conditions in several of our core markets through 2018 have slowed our overall rate of growth.

Through 2018 we have seen the UK construction sector hit by the uncertainty of the Brexit talks with the consequence of investment and work on major infrastructure projects being delayed.

Across Asia-Pacific we have seen a strong recovery in our Australian business, where we have won work across a significant spread of sectors, including infrastructure and commercial building. Hong Kong, which saw the completion of two huge infrastructure projects in 2017, now awaits the mobilisation of the next wave of infrastructure spending. The performance in the Middle East has been hampered by the trade blockade placed on Qatar by other GCC countries and delays to project announcements in KSA. The UAE continues to be a strong market although due to weakening or other Middle Eastern markets has become significantly more competitive.

Our investment in ground shoring products continues, with a launch into Hong Kong and the Middle East regions. Products landed in country in the final quarter of 2018 and this continues to be a focus of our expansion plans. The year also saw the RMDK exit Spain and Panama, as a consequence of our recent strategic review.

The Directors believe that the next 12 months will continue to see the expansion of the ground shoring products into new markets, and the further development of our product offering into the commercial building sector which will help us reduce the impact of project delays inthe infrastructure sector.

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.

1 Excluding Exited Business.

2 Includes share of associates.

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

UK

Interserve's construction business offers design and construction services to create whole-life solutions including client needs analysis, business case support, design, construction and FM (provided though Support Services), maintenance, remodel, refurb and eventual demolition and estates planning sustainable solutions for building and infrastructure projects.

The UK construction market, while benefiting from major infrastructure improvements and housing investment, remains volatile at a macro level from Brexit, resources and associated headwinds but also construction confidence generally, post-Carillion.

The construction business strategy to focus on low risk, principally government assets and infrastructure is a partial hedge against economic downturn, post Brexit. Growth in government infrastructure is driven by policy and demographic changes in the UK with expected long-term investments from the UK Government in order to support economic growth as described in the Government Construction Sector Deal. In addition, digital technology and long-term trends in travel and freight are creating demand for the construction of transport infrastructure such as logistics centres and airports. Similarly, demographic changes are expected to create demand for schools and universities as well as medical services facilities. Across the sectors, there has been a movement in recent years towards the increased use of modern methods of construction, which offer faster, more reliable and more efficient production.

The construction business's focus is on forming long-term relationships and delivering repeat business through commercial structures such as framework agreements.

2018 was a better year for our UK Construction business despite the ongoing period of challenging market conditions. Good progress has been made in closing out some challenging projects and legacy accounts. Our regional building business, infrastructure business and engineering services business all made solid returns, which resulted in a return to profit for the division.

We continue to focus on core sectors and activities and ensure that the risk profile of work that we take on is commensurate with levels of return. Revenue is expected to fall in 2019 as some of the larger legacy contracts complete and also due partly to some of the wider challenges the Group faced in 2018. Whilst we expect the division to be a smaller business by revenue in 2019 it will be capable of consistent profit margins in line with industry norms and capable of steady growth going forward.

During the year we continued to focus on cost, pricing and bidding controls, a narrow strategic focus, restricting work-winning activity to select sectors, regions and activities.

Our operating model continues to combine a strong regional presence and exposure to framework agreements with infrastructure and public-sector customers, in core sectors such as the defence, education, healthcare and fit-out markets.

In the last 12 months, UK Construction has also secured further new construction frameworks including Dept of Work and Pensions, Dept for Education, Crown Commercial (Government Property Unit Framework) and Welsh Government Healthcare framework, adding to the existing portfolio of customers. This gives a combined forward opportunity pipeline in excess of £1.2bn per annum from which tender opportunities are carefully selected through a PLC governed selection process. Revenue is 70% with public or arm's length public bodies aligned to the lower risk defensive strategy.

Plans are in place to improve organisational structure and capability to support future profitability and performance and will be rolled out early 2019. Our focus remains on quality contracts, targeting profits and not revenue.

FINANCIAL CONDUCT AUTHORITY INVESTIGATION UPDATE

As notified to the market on 11 May 2018, Interserve is the subject of an investigation by the Enforcement Division of the Financial Conduct Authority (FCA) in connection with the Company's handling of inside information and its market disclosures in relation to its exited Energy from Waste business during the period from 15 July 2016 to 20 February 2017.

The Company is co-operating fully with the investigation. As with any regulatory investigation of this nature it is difficult to predict when the investigation will be completed or its outcome. If the FCA takes further action, members of the Group and/or their current or former directors or employees could face regulatory or compensatory sanctions, which could result in adverse publicity and/or reputational damage and which could have a material adverse effect on the Group's business, results of operations and financial condition.

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. 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 2018 are depicted in the column entitled "Risk Environment".

The Group is exposed to operational currency risk in its International and Equipment Services businesses. These are not material on a net basis. In addition, the Group has foreign currency exposure in relation to its historical US Private Placement borrowings and the interest cost of servicing those borrowings. 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

2018 has seen an improved operating performance for the Group as we have focused on executing our fit for growth programme and delivered savings from the simplification of our businesses. This is despite the decline in revenue and reflects the focus on quality of business within our UK Construction business.

Net debt increased in the year as we have continued to address the EfW contracts as well as the exiting of London and South East regional building business. This has also been impacted by the £43.0 million of adviser fees related to the April 2018 refinancing as well as the £42.8 million cash interest cost in the year resulting from the higher finance costs and increased debt levels.

The Financial Review does not deal with the underlying operating profit and revenue of each individual trading division. For commentary on these underlying operational results please refer to the Operational Review section of the Strategic Report.

REPORTED FINANCIAL PERFORMANCE

2018 consolidated revenue of £2,904.0 million was 10.7% lower than in 2017 (£3,250.8 million) with a substantial reduction (£216.2 million) in UK Construction driven by lower activity levels as we have struggled to win new work and EfW projects completing. After amortisation of acquired intangible assets, goodwill impairment and other non-underlying items, analysed in further detail in note 4 to the consolidated financial statements and discussed further below, the operating loss was £5.9 million (2017: loss £224.8 million).

AMORTISATION OF ACQUIRED INTANGIBLE ASSETS

Intangible assets acquired as part of historic acquisitions of businesses are amortised over their useful economic life and during 2018 £18.7 million of amortisation was charged to the income statement (2017: £21.6 million).

GOODWILL AND OTHER ASSET IMPAIRMENTS

During 2018 the carrying value of the Industrial Services business was impaired by £15.0 million and a further £7.1 million loss incurred on its final disposal.

As part of the Group's 31 December 2018 annual goodwill and intangible assets impairment review, further write-downs of the carrying values of its Support Services Private Sector cash generating unit (£26.9 million) principally related to the acquisition of Initial Facilities in 2014 and a further £6.2 million on its Learning and Education business.

CONTRACT review AND BALANCE SHEET REVIEW

During 2018 a further net £5.2 million of contract review provisions were made being largely £11.4 million on the CRC Transforming Rehabilitation contracts, partly offset by an £8.0 million release of provisions against the US Prime Forces onerous contract.

ENERGY FROM WASTE

A further net £12.6 million of provision for losses from our Energy from Waste facilities have been made during 2018 which relates principally to further costs to complete our Derby City and County Councils facilities. Insurance proceeds totalling £35 million were received during 2018 on Energy from Waste contracts.

 PROPERTY DEVELOPMENT

As announced in the 2017 year-end results, we took the decision at the end of last year to exit from the business of Property Development. During 2018 we have sold our one remaining development asset (the Haymarket site in Edinburgh) for net proceeds of £47.0 million and realised a gain of £17.0 million on disposal.

LONDON CONSTRUCTION

We took the decision during 2018 to exit from activities in the London construction market but will continue to offer fit-out but not building projects in the London region. Costs associated with this exit and anticipated losses on the close out of contracts within this business amounted to £24.8 million. We anticipate that this exit and the associated cash outflows will conclude in 2019.

restructuring costs

The Group has embarked on a 3-year plan, "Fit for Growth", to increase the Group's organisational efficiency, improve Group-wide procurement processes and ensure greater standardisation and simplification across the business. During the year it incurred termination costs in respect of former employees and directors, property rationalisation expenses and other business closure costs amounting to £20.0 million.

PROFESSIONAL ADVISER FEES

Professional fees incurred in connection with our refinancing totalled £43.0 million during the year. We anticipate that we will incur a further circa £33 million of fees in connection with the Deleveraging plan.

EXIT FROM SITE SERVICES AND POWER BUSINESSES

During the year we took the decision to exit from the Power business in Support Services and the Site Services business in Construction at a cost of £4.2 million and £2.5 million respectively.

PENSION INDEXATION GAIN

During 2018, following discussions in recent years between the Company and the Trustee of the Interserve Pension Scheme, the Trustee agreed to change scheme terms relating to the inflation reference index used to calculate increases to some members benefits in the scheme from RPI to CPI. The gain arising from this change in inflation index during 2018 amounted to £70.6 million.

Net FINANCE COSTS

The net finance cost for the year of £105.4 million can be analysed as follows:

Higher net interest on Group debt of £79.4 million (2017: £21.4 million) reflects the much higher average prevailing net debt levels during 2018 and the substantially higher interest rates on group debt following the April 2018 refinancing.

Within net debt the Group carries $348.3 million of US private placement notes. On 13 December 2017 the Group disposed of all hedging instruments resulting in the free float of the borrowings with all subsequent retranslation gains or losses on the value of this debt being recognised through the income statement as a non-underlying item. During 2018 this resulted in a loss of £26.4 million (2017; gain of £2.9 million). The $348.3 million private placement has a GBP value of £272.3 million as at the balance sheet date, reflecting the closing rate of 1.28 USD 1 GBP.

The IAS 19 pension credit position results in a non-cash pension finance income of £0.4 million (2017: £1.1 million cost). See note 5/6 for further details.

Taxation

The underlying tax charge for the year of £8.7 million on the headline profit before tax represents an effective rate of 63.5 per cent.

1The Group's share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.

The subsidiary companies' tax is considerably higher than the UK rate of 19%, principally driven by the impact of unrelieved UK losses. For further disclosure on the non-underlying items and amortisation see note 5 to the consolidated financial statements. See note 9 for further tax disclosures.

Dividend

The dividend remains suspended with no interim or final dividend due to be paid. Under the terms of our existing financing facilities, no dividend is payable until historical net debt to EBITDA is below 2.5 times. This will change under the Deleveraging Plan which will require more than two-thirds of the new money lenders and more than two-thirds of the new money bonders to approve any dividend.

cash flow

Year-end net debt stands at £631.2 million (2017: £502.6 million), an increase of £128.6 million.

In 2018 there has been a much stronger operating cash flow performance (before movements in working capital) than in 2017 (+£17.6 million vs -£111.3 million) driven to a large extent by a reduction in the EFW cash outflows in the current year vs 2017 of £66.2 million.

Net interest paid in 2018 of £39.6 million has increased significantly compared to 2017 (£21.4 million) in line with much higher average Group borrowings during the year and significant increases in the interest rates charged post the debt re-financing in April 2018.

As part of the re-financing of the Group's borrowings in April 2018 we issued warrants to the providers of debt and bonding facilities with fair value proceeds of £35.7 million including £0.4 million from the exercise of warrants.

Capital expenditure on non-hire fleet of £19.6 million principally relating to spend on Ingenuity House and vehicles, was significantly lower in 2018 compared to £39.3 million in 2017 as the Group exercised investment restraint in a cash constrained climate.

Net working capital outflows of £77.5 million (2017: £37.0 million outflow) are largely made up of the following: a favourable movement in receivables of £59.2 million being mainly improved cash management in Support Services and the unwinding of debtors in Construction as a result of a reduction in the size of their business ; and a £135.0 million decrease in trade payables which reflects a more normalised year end payment process compared to the prior year and the close out of a number of large projects in Construction during 2018.

Pensions

At 31 December 2018 the Group had an IAS 19 pension surplus of £93.9 million (2017: £48.0 million net deficit).

The IAS 19 accounting position on the Group's defined benefit pension scheme increased from a deficit of £48.0 million to a surplus of £93.9 million largely due to a change in the basis of indexation on future pension increases from RPI to CPI (£70.6 million) together with an actuarial valuation gain of £54.0 million.

NEW ACCOUNTING STANDARDS

IFRS 9 Financial instruments

We have adopted IFRS 9 Financial instruments from the beginning of this period. During the period we concluded our review of the implications of the adoption of IFRS 9 Financial Instruments which we adopted from the beginning of the period. The review included a review of the classification of assets previously held as available for sale under IAS 39, and the application of an expected credit loss model under IFRS 9. The review comprising the assessment of amounts receivable from the sale of goods and services and amounts due from construction contract customers concluded that the adoption of IFRS 9 did not result in any material change. As disclosed in the 2017 Annual Report, there was no quantitative impact on the Group upon adoption. 

IFRS 15 Revenue from contracts with customers

During the period we concluded our review of the implications of the adoption of IFRS 15 Revenue from contracts with customers which we adopted from the beginning of this period. As disclosed in the 2017 Annual Report, we identified no material change in the way that we recognise revenue on contracts with customers.

However, we did identify an issue with the transition from IAS 11 Construction contracts whereby costs that we had previously capitalised under that standard on contracts that were ultimately onerous, where future recovery was anticipated from a third party other than the customer, are not covered by similar provisions in IFRS 15. As such the recognition of an asset in these circumstances falls to the more restrictive requirements of IAS 37 Provisions, contingent liabilities and contingent assets. In order to recognise the asset IAS 37 requires recovery to be virtually certain rather than expected, otherwise it falls to be treated as a contingent asset and disclosed rather than recognised. Whilst we remain confident of recovery and our ultimate expectation is unchanged, we are not able to meet the requirement of virtually certain which we have interpreted as being as close to 100% as to make any remaining uncertainty insignificant.

We have adopted IFRS 15 through the "modified retrospective adoption" approach and as such have booked a cumulative catch up adjustment to the opening balance sheet (charge to equity and increase in provisions) of £37.5 million without altering comparatives. These recoveries will now flow through the income statement as received (in effect the £37.5 million became an unrecognised contingent asset). Had IFRS 15 not been adopted, 2018 revenue would have increased by approximately £32.5 million.

We have made a number of other immaterial adjustments as a result of the application of IFRS 15, including minor amendments to revenue recognition where we believe that it is not highly probable that amounts will not be reversed.

At the date of authorisation of these financial statements the following standards and interpretations were in issue but not yet effective, and therefore have not been applied in these year-end financial statements.

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, including those currently recognised as operating leases, with corresponding assets being created.

TAX STRATEGY AND RISK MANAGEMENT

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 Chief Financial Officer 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 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.

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. Where possible 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.

During 2018 the Group had access to committed debt facilities comprising a $350 million US private placement and £583 million of committed bank facilities. The US private placement was translated into GBP at the prevailing exchange rate at the 31 December 2018. During the year £33.2 million of committed facilities were prepaid and cancelled. The aggregate facilities of £824.3 million at the year-end date had a weighted average expiry date of September 2021.

On 27 April 2018 the Group secured new financing from its lenders. The additional facilities, totalling £196.5 million, comprised a term loan of £175 million and £21.5 million of money market lines and committed bonding facilities of £95 million. These facilities are scheduled to expire in September 2021.

Additionally, as part of the proposed deal terms, the company issued warrants to the providers of the new cash and bonding facilities to buy shares at 10 pence per share (the nominal price of each share). If exercised, this would provide the warrant holders with an interest of up to 20% of the post-issue share capital.

The agreement by the lenders to provide new facilities contains provisions to charge interest on the facilities which does not become payable until the maturity of the facilities. The interest is capitalised on each quarter end date and forms part of the debt balance at the balance sheet date. The value of interest capitalised on loan facilities in 2018 was £24.7 million. The value of interest accrued in respect of issued instruments drawn on the committed facilities was £4.3 million.

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.

Foreign currency risk

Transactional currency translation

The revenues and costs of our trading entities are typically denominated in their functional currency. 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.

As at the balance sheet date the $348.3 million of debt relating to the US private placement was unhedged.

The impact of changes in the 31 December 2018 year-end exchange rates, compared to the rates used in preparing the 2017 consolidated financial statements, has been an increase in net assets attributable to equity holders of £14.0 million (2017: £35.2 million decrease).

VIABILITY STATEMENT

This statement is made against a background of challenging market conditions in the UK support services and construction sectors and the collapse into liquidation of a major competitor, Carillion in early 2018. In the face of adverse media speculation, Interserve, Capita, Kier and others in similar markets have taken steps to improve balance sheet strength and resilience.

The directors have reviewed the viability of the Group over a three-year period to December 2021. The choice of a three-year period reflects the secured nature of the Group's revenues with £7.1 billion (of which £5.5 billion is secured) of work in the order book. There is a negligible amount of secured work outside of this timeframe in the Construction division and only 35 per cent in the Support Services division. The viability period chosen aligns with the annual planning process.

Strategy and key judgements

In April 2018 the Group announced a multi-year strategy with four key priorities:

1. Fit for Growth - a simplified organization that will deliver reduced overhead costs

2. A competitive customer value proposition

3. Standardised operational delivery

4. One Interserve - a consistent approach to leadership, performance management, reward and recognition

In creating its plan, the Board has considered the principal risks and uncertainties in the implementation of the Group strategy as well as those inherent in the business. The key planning assumptions are outlined below:

1. The new financing structure is concluded with necessary consent obtained from lenders and shareholders

2. No significant political changes in the UK or overseas that will impact public sector outsourcing.

3. Continued progress in improving margins and operating profit driven by targeted cost savings and selective contract bidding.

4. Success in recovering professional indemnity insurance claims relating to the construction of the Derby EFW plant. This follows a successful outcome in relation to similar claims in 2018 in respect of the Glasgow EFW plant.

5. Termination account payments on the Glasgow EFW plant will be within the allowance made, a sum that is materially lower than amounts claimed by the client. This is considered in further detail in this statement.

6. Trade debt with Saudi colleges will be fully recoverable in line with previous debt recovery experience in the region.

7. The plans for dealing with loss making contracts within the profitable PFI portfolio in the Support Services division will be successful in reducing any future losses.

8. Both customer and supplier payment terms will improve following the refinancing.

As part of the planned re-financing, the Group and / or its subsidiaries will be making undertakings to its lenders which are summarised below. Plans have been made to meet all the requirements but it is noted that non-compliance would be an event of default under the terms of these financing arrangements and would potentially impact on the ability of the Group and / or its subsidiaries to continue trading as going concerns.

A condition of the additional lending are financial covenants, starting in December 2019 for the Interserve Group excluding RMDK, and in June 2019 for RMDK.

For the Interserve Group, excluding RMDK, there is a proposed minimum EBITDA covenant: Dec-19: £50 million, Jun-20: £60 million, Dec-20: £60 million, Jun-21: £70 million, Dec-21: £70 million. Also, a minimum cashflow available for debt service Dec-19: £ (145) million, Jun-20: £20 million, Dec-20: £45milion, Jun-21: £50 million, Dec-21: £50 million. The loan maturity is 2022.

For the RMDK facility (non-recourse to the rest of the Interserve Group) there is a maximum leverage covenant being multiples of EBITDA: Dec-19: 3.1, Mar-20: 2.6, Jun 20: 2.6, Sep-20: 2.3 and Dec-20: 2.0. Also a minimum liquidity requirement of £3 million from September 19. The loan maturity is 2023.

In addition, the Group has committed to provide a funding proposal in respect of any Energy from Waste settlements greater than those currently forecast in the business plan.

It is also required to engage with lenders within three weeks of submitting two consecutive short-term cash flow forecasts that predict a cash requirement not covered by the debt facility.

As discussed in note 1 to the financial statements, significant judgements have also been taken with respect to the outcome of other contracts and there is an assumption that costs will fall within anticipated and provided levels. This relies upon, as yet, unsecured negotiations to settle or de-scope contracts. Conclusion of these negotiations, is at least, partially outside the control of the directors and could have a sizeable adverse impact on the Group.

It is management's view that the Deleveraging Plan, if approved by shareholders on 15th March 2019, will place the Group in a strong position to deliver the strategy, be competitive in the marketplace and provide a secure future for the Group's employees, customers and suppliers.

Prior to successful conclusion of the Deleveraging Plan, the level of uncertainty around the Group's financial position has been adversely impacting customer and supplier confidence as well as influencing employee morale and credit ratings. If confidence is slow to return it will be detrimental to the Group's recovery plans in 2019.

Looking beyond the twelve-month timeframe, to the remainder of 2020 and 2021, there are additional assumptions about market stability in the UK and overseas which are outside the control of the directors. A significant deterioration in these markets would impact the Group's long-term viability.

The Group has carried out a comprehensive business planning exercise on all other aspects of its business. The approach that has been adopted and the sensitivities considered are discussed further below.

Assessment process

The future prospects of the Group are assessed primarily through the annual planning process. This entails a series of detailed operational reviews culminating with divisional reviews involving the Group CEO, Group CFO and divisional management team. The results of these reviews are then submitted to the Board in the form of a plan summary document for debate and approval.

The output is a full set of income statement, cashflow and balance sheet projections for each of the reporting entities of the Group. These exist at monthly frequency for the first two years of the strategic plan (2019 & 2020) and annually for the final year (2021).

This year, the outputs were reviewed and reported on by advisers acting on behalf of the Group's Lenders.

Progress against this plan is monitored, on a monthly basis, via monthly divisional business reviews with the Chief Executive and Chief Financial Officer and management accounts which are submitted to the Board.

Subsequent to December 2018 the plan was amended to reflect the de-leveraging proposal presented to the Group's debt holders and the approximately £33 million of adviser fees associated with this.

Following these amendments, the plan reflects a reduction in Interserve Group's pro forma net debt from the issuance of £480 million of new equity. £350 million of existing debt is allocated to RMDK, of which £169 million is cash-pay and £181 million has been converted into a subordinated non-cash pay debt instrument. The debt allocated to RMDK is non-recourse to the rest of Interserve Group and has maturities extended to 2023. Following the refinancing, Interserve Group excluding RMDK will have a £110 committed debt facility which matures in 2022.

Net cash-pay leverage of the Interserve Group (excluding the RMDK non-cash pay debt instrument) is expected to reduce to less than 1 x EBITDA and total net leverage (including the RMDK non-cash pay debt instrument) reduces to less than 2x EBITDA.

Assessment of viability

Although they consider that the output of the annual strategic planning process represents the best estimate of future prospects of the Group, the directors have also stress tested the future viability of the Group by considering a number of sensitivities to the plan.

These scenarios have been informed with reference to both the Principal Risks and Uncertainties of the Group and the key strategic planning assumptions. All scenarios assume the successful completion of the proposed Deleveraging Plan. The scenarios are:

With the anticipated Deleveraging Plan in place, the Company would be able to sustain all of these scenarios in combination and still remain within the proposed committed facility limits and comply with the covenant tests. However, additional unmodeled scenarios exist that could cause breaches of either the absolute committed facilities or covenants. These principally involve a failure to secure the proposed financing, a significant worsening in the cost to complete or final account settlements within the EFW business or significant adverse macroeconomic events. The directors have applied the assumption unmodeled scenarios will not occur.

Viability statement

The Group faces a number of uncertainties in relation to the final outcomes on its Energy from Waste contracts and political uncertainties in the Middle East which are detailed in this statement and in the prospectus. It has plans in place that have been stress tested with a number of reasonable worst case scenarios however there can be no certainty that it will remain viable. The directors have a plan which they are implementing but they acknowledge the inherent risks of delivery, some of which are outside their control.

While the directors have every expectation of successful completion of the financial restructuring, this is contingent on approval of the detailed transaction by 50% of shareholders. The Group has been in discussion with lenders and there is every indication that the detail will be agreed and confirmed by the 15th March but there is no certainty. The transactions will put to shareholder vote on this date. Failure to conclude the Deleveraging Plan may cast significant doubt over the Group's ability to continue as a going concern, and consequently may cast significant doubt over its viability.

GOING CONCERN STATEMENT

The directors have carried out a detailed review of the viability of the Group over the period to December 2021. This review has involved stress testing of the current strategic plan of the Group under a number of scenarios and has considered risks and uncertainties to both the near and medium term.

Based on this analysis, with no unforeseen deterioration in the remaining EFW projects and approval of the Deleveraging Plan by shareholders, the directors have a reasonable expectation that the Group has adequate resources to continue as a going concern for the foreseeable future, representing a period of at least a year from the date of this statement. The Board of Directors has considered the length of going concern period for this assessment and taking into account the terms of the replacement financing facilities and proposed Deleveraging Plan, have concluded that a going concern period of 12 months remains appropriate.

In making this assessment the directors recognise that there is a material uncertainty in relation to the approval of the Deleveraging Plan by shareholders and failure to secure shareholder approval represents a material uncertainty that may cast significant doubt over the Group's ability to continue as a going concern.

Based on current expectations, and on the basis that the directors have every expectation of successful completion of the financial restructuring, the directors consider it appropriate to continue to adopt the going concern basis in preparing the financial statements.

INCOME STATEMENT

Consolidated income statement

For the year ended 31 December 2018

# - restated (note 15)

Consolidated statement of comprehensive income

For the year ended 31 December 2018

Consolidated balance sheet

At 31 December 2018

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 £14.8 million relating to the revaluation of financial assets within the joint ventures held at fair value through other comprehensive income (2017: £16.0 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 2018 was 32,144 (2017: 466,909), with the market value of these shares at 31 December 2018 being £0.0 million (2017: £0.4 million).

Consolidated cash flow statement

For the year ended 31 December 2018

1 General information and critical accounting judgements

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 2019, does not constitute the Company's statutory financial statements for the years ended 31 December 2018 or 2017 but is derived from these accounts.

The financial information for 2017 is derived from the statutory accounts for 2017, which have been delivered to the Registrar of Companies. The auditor has reported on the 2017 accounts; their report was (a) unqualified, (b) did not include a reference to any matter to which the auditor drew attention by way of emphasis of matter, and (c) and did not contain statements under section 498(2), (3) or (4) of the Companies Act 2006.

The statutory accounts for 2018 will be finalised on the basis of the unaudited financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting. The audit report is expected to include reference to a material uncertainty relating to going concern to which the auditor will draw attention by way of emphasis. The Company expects to publish its statutory accounts before the end of March 2019.

Critical accounting judgements

In the preparation of the consolidated financial statements management makes certain judgements and estimates that impact the financial statements. While these judgements and estimates are continually reviewed the facts and circumstances underlying them may change and that could impact the results of the Group. Each judgement identified below also includes, where relevant, an assessment of the key sources of estimation uncertainty. In particular:

Glasgow Energy from Waste (EfW) plant

In July 2012 Interserve was appointed by Viridor as the Engineer Procure Construct (EPC) contractor for the construction of the Glasgow EfW plant. In December 2016 this contract was terminated by the client. During 2018 the Group successfully concluded its professional indemnity insurance claims, with all cash being received in the period. The key remaining judgement remains the final account settlement with Viridor and whether this will crystallise within current expected parameters.

Differences of interpretation of certain contract provisions between the parties exist, which are capable of having a material impact on the liability of the Group for compensation on termination. These issues include, but are not limited to:

i. Application of the liability cap to Viridor's claims;

ii. The order in which limitations on liability are taken into account in the compensation calculation;

iii. The scope of contractual pain-share provisions;

iv. The recovery of Viridor's indirect losses; and

v. Viridor's duty to mitigate its costs incurred in completing the works.

The judgements in this regard have been based upon appropriate legal and technical advice and the directors regard them as appropriate. Viridor's parent company's half year results to 30 September 2018 included a net receivable due from Interserve relating to this project of £64 million. Since the year end Viridor has submitted a draft termination account to Interserve significantly in excess of this receivable. The Directors believe this has no technical merit. The Glasgow contract contains an overall limit on Interserve's liability to Viridor under the contract which Interserve calculates after deducting payments to date as £71.0 million.

The directors have taken the view that the differences between the parties will be substantially narrowed if the interpretation disputes (i), (ii) & (iii) above are resolved. Assuming the director's views on these points are correct, the liability would be between £nil and £33.5 million. If not, the liability could be higher. The directors consider that their best estimate of the outcome is £14.7 million which is the accrued cost in the balance sheet to settle the final account.

Interserve believes that there are strong claims that there are provisions in the contract that limit the scope of the Group's liability. Accordingly, Interserve commenced an adjudication seeking a statement of law in respect of (i), (ii) & (iii) above on 8 February 2019 and expects a decision to be delivered by April 2019. Any decision by the adjudicator could be subsequently challenged through formal arbitration. There can however be no assurances as to the ultimate amount of any liability.

Derby EfW plant

In August 2014 a special purpose vehicle (SPV) (formed as a 50:50 joint venture between Interserve and Renewi), Resource Recovery Solutions (RRS), was awarded the contract by Derby City and County Councils (the Councils) for the construction and operation of the Derby EfW plant. The SPV awarded an EPC contract to Interserve Construction for the construction of the plant.

The Group completed the physical construction of the plant in 2017 and started receiving municipal waste in January 2018, however the project has been delayed past the long stop date of September 2018. During the fourth quarter of 2018 Acceptance testing commenced and discussions are currently ongoing as to how to demonstrate satisfactory completion of the tests. Transfer testing is due to commence shortly once the plant is believed to be capable of performing at the optimum levels.

The key remaining judgements are:

· The Acceptance and Transfer Tests are passed and independently certified within the current projected timescales

o The Derby EfW plant has been operational since September 2018, excluding periods where defect rectification works have been completed. The directors are confident that the Derby EfW plant will ultimately meet or exceed the required outputs.

o Delays would likely result in increased contractual costs to complete and damages. Depending on the cause, these costs could be recovered from insurers. It is not possible to quantify unknown circumstances which could cause delays, however current rates of costs and damages are c£1.5 million per month and the adjustment would increase cost of sales and either provisions or accruals in the balance sheet.

· Performance and availability damages are not levied as the plant operates at the required contractual levels

· Interserve is not terminated on the project

o In the event that Interserve and the Councils cannot come to an agreement, the councils may exercise their contractual right to terminate the Project Agreement which in turn would lead to the termination of the Construction Contract.

o Given the stage of completion of the project the Directors do not believe this would be a desirable outcome for all parties.

o The financial impact of such an event would depend on the calculation of the market value of the project, which the directors expect would reduce Interserve's debt and equity return in the SPV but not create a claim against Interserve. Interserve's equity and debt interests in the SPV were valued at £12.4 million at 31 December 2018, which is shown as an investment in joint ventures in the balance sheet. In addition, the project finance lenders would seek to recover their losses from Interserve as a result of Interserve's alleged default in terms of failing to achieve completion by the long stop date.

o The directors believe Renewi require Interserve's consent as shareholder of the SPV to terminate Interserve's construction contract.

The Company has, as yet, not recognised any value for professional indemnity (PI) insurance claims relating to the construction of the Derby EfW plant

o This contract has been significantly loss making and, as required under IFRS, a forward loss provision has been taken. This forward loss provision does not assume any PI insurance recoveries. The directors expect that, as on the Glasgow EfW project in 2018, significant PI recoveries on Derby EfW plant will be achieved.

o A notification has been made to the PI insurer of claims. The claims predominantly relate to alleged design deficiencies and negligence of key subcontractors, particularly design deficiencies relating to the Advanced Conversion Facility (ACF) power plant. The claims are conceptually similar to the successful claims made on the Glasgow EfW plant.

o Interserve are yet to fully establish its entitlements as the project has not concluded, and recoveries will be recognised in the income statement when cash is received. It is only at this point the directors deem the likelihood of recovery to meet the virtually certain recognition criteria of IAS 37. The range in outcome from these claims is between £nil and £50 million, which is the maximum receivable through a single claim under the policy. As at the balance sheet date, the directors expect to receive in excess of £30 million, however fully detailed and substantiated submissions have not been submitted. The timing of the resolution of the insurance claims are not fully within the control of the Group, however the directors expect substantial insurance proceeds during the second half of 2019.

Future losses on the Ministry of Justice CRC contracts will fall within acceptable levels

Interserve is involved in providing probation and rehabilitation services to the Ministry of Justice (MoJ). These services are provided via five community rehabilitation companies (CRCs) each of which holds a contract to provide services in a given geographic area. During 2018, a fundamental variation to the contracts was agreed which improved their viability but still left a substantial loss over their remaining life across all five of the contracts. The forward loss provision of £12.1 million booked in the prior year has been updated for these developments and continues to be reviewed on a regular basis.

The year-end 31 December 2018 forward loss and impairment provisions of £11.4 million included within the other debtors represents a fair assessment of a number of potential outcomes. The sensitivities principally pertain to the Performance by Results income which is impacted by reoffending data published by the Ministry of Justice on a quarterly basis and there are a number of factors which have a material impact on reoffending.

ILE International Saudi debt

Interserve Learning and Employment International (ILE) had £36.0 million of outstanding debt at 31 December 2018 including trade debtors and accrued income. Of this, approximately £17 million is recorded in deferred income as relating to activities to be undertaken in 2019. £15.7 million of the debt was greater than 90 days old at the year and only £1.8 million is over a year old.

Since the start of Q4 2018, it has been evident that our immediate customer, Colleges of Excellence ('COE'), has had a funding shortfall from its funding partner, Human Resources Development Fund ('HRDF'). Initially COE commented to us that only 44% of outstanding payments would be made. We received 44% of the amount due on the main COE contract but between the second half of October and 31 December 2018, we have had no further receipts. The Health programme, where we have been paid, is funded by the Ministry of Health.

We believe that we will be paid in full for all of the outstanding sums and that no bad debt provision is necessary at this stage based on the following reasons:

i. The client has verbally assured us on innumerable occasions that we will be paid and that the issue is purely one of timing.

ii. Moreover, the client has asserted in writing on a number of occasions that we have performed all of our obligations, that the sums are due and that subject to the finalisation of its own funding arrangements, these sums will be paid. We are establishing a fact pattern for each contract to affirm the weight of evidence supporting these assertions.

iii. We have now raised breach notices on all contracts and we have had no responses from the customer which would contest our right to raise the breach notices, or entitlement to payment. If they had, such an action would prejudice our right to 100% of the debt.

iv. Our contracts are reasonably straightforward, we have carried out those contracts and have exercised our rights according to these contracts.

v. It is not uncommon for payments to be made relatively slowly in Saudi Arabia and our experience of COE is that whilst payments have been slow, we have historically been paid.

vi. The COE have continually stated throughout this process that Interserve is a strong strategic partner for the programme and that they will shortly be entering into discussion to extend the current contracts, prior to commencing the process of the recommissioning and expansion of the current programme.

vii. We have robustly documented our position and we believe we are in a strong place if ever we were to have to take our case to a higher authority - the Saudi Crown Prince or the Courts.

In the circumstances, we are firmly of the view therefore that we will be paid in full in due course for all of the sums due and this position is supported by the fact that we have recently received approximately £13 million of cash in part settlement of the outstanding debt.

Accounting for debt restructuring under IFRS 9

On 27 April 2018 the Group re-negotiated its existing credit facilities which consisted of the renewal of existing Revolving Credit Facilities of £388.6 million and $350 million of US Loan Notes and obtaining £175 million of new Term Loans (LIBOR + 8.75%) together with £21.5 million of Money Market lines. These renewals of the RCF and US $ Loan Notes (together, 'the Override Agreement') were at significantly higher rates of interest than previously (LIBOR + 6.43% for RCF vs average of 2.8% in 2017 and LIBOR + 7.61% for the US$ Loan Notes vs average of 5.6% in 2017).

We concluded that the changes in the terms of the Override Agreement constituted a substantial debt modification under IFRS 9 and therefore existing loans were derecognised and new loan balances were recognised. The Override Agreement was concluded at the same time as the Group securing new lending, under the terms of a new 'Super Senior Agreement'. The substantially modified debt was initially recognised at fair value, calculated based on the expected present value of future cash flows, discounted at an effective interest rate reflecting the Group's cost of borrowing. Our view is that the effective rate of interest on the loan was consistent with the market rates existing in April 2018. A total of twenty three different banks participated as a syndicate on the Revolving Credit Facility and five institutions on the US$ bond. A significant proportion of these banks also participated in the Super Senior Agreement, alongside two lenders who had not previously participated in the syndicate. On the basis of these facts, we concluded that this indicates that the interest rates offered were arms-length in nature based on market-based pricing. The impact of these judgements was that there was no significant gain or loss on refinancing under the terms of the Override Agreement, and that the increased cost of borrowing in the Override Agreement is consistent with the prevailing market rate.

Measurement of impairment of goodwill and intangible assets

The carrying value of goodwill and intangible assets is reviewed for impairment at least annually. In determining whether goodwill is impaired an estimation of the value in use of the cash generating unit (CGU) to which the goodwill has been allocated is required. This calculation of value in use requires estimates to be made relating to the timing and amount of future cash flows expected from the CGU and suitable discount rates based on the Group's weighted average cost of capital adjusted to reflect the specific economic environment of the relevant CGU. These estimates have been used to calculate a £33.1 million impairment against goodwill in Support Services.

An impairment review of the Group's investments in associates was also carried out at 31 December 2018. We specifically assessed the impact of the current economic blockade in Qatar as a potential indicator of impairment. We have concluded however that the Qatar blockade is of a temporary nature and that therefore no impairment provision is required at 31 December 2018.

Retirement benefit obligations

The Group has assessed that under IFRIC 14 IAS 19 it is appropriate to recognise a pension asset in the balance sheet at 31 December 2018.

Judgement is exercised in establishing the fair value of retirement benefit assets, most notably the valuation of the buy-in contract to insure some of the benefits of a subset of the pension membership of the scheme provided by the insurer. This requires judgement of the proportion of the buy-in contract that exactly matches the amount and timing of benefits payable and the choice of an appropriate valuation technique in accordance with IFRS 13.

Non-underlying item presentation

IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company's profitability. In practice, these are commonly referred to as 'exceptional' or 'non-underlying items', but this is not a concept defined by IFRS and therefore there is a level of judgement involved in determining what to include in headline profit. We consider items which relate to non-recurring events and are significant in size or in nature to be suitable for separate presentation (see note 4).

2. Accounting policies

General

The financial statements have been prepared 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 financial statements are presented in sterling, rounded to the nearest thousand (£'000) unless otherwise stated. They have been prepared under the historical cost convention, except for the revaluation of certain financial instruments that have been measured at fair value.

Basis of preparation

The financial statements have been prepared on the going concern basis, which assumes that the Group will continue to be able to meet its liabilities as they fall due for the foreseeable future. In assessing the going concern assumptions, the Board has reviewed the base case plans, identified downsides and anticipated receipt of proceeds from the proposed Deleveraging Plan. Following this assessment, the Board has a reasonable expectation that the Group will be able to operate as a going concern for the foreseeable future.

In undertaking the assessment, the Board has considered the fact that the Deleveraging Plan is subject to a shareholder vote, an event which is outside of the control of the Group. These events and conditions indicate a material uncertainty on the completion of the Deleveraging Plan, which may cast significant doubt about the Group's ability to continue as a going concern.

The going concern basis has been adopted for 2018 because the directors believe that the Group has realistic plans for the future growth of the business and every expectation of successfully completing the Deleveraging Plan by the end of March 2019. The Board believes that, with the Deleveraging Plan in place, even in a reasonable worst-case scenario, the Group will continue to have adequate financial resources to realise their assets and discharge their liabilities as they fall due. Accordingly, the Directors have formed the judgement that it is appropriate to prepare the financial statements on the going concern basis. Therefore, the financial statements do not include any adjustments which would be required if the going concern basis of preparation is inappropriate.

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 StatementsFor the year ended 31 December 2018

Business segments

# - restated (note 15)

Notes to the Consolidated Financial Statements - continued

For year ended 31 December 2018