Interserve Regulatory News (IRV)

News Release

19 October 2017

Trading Update

Interserve, the international support services and construction group, provides an update on current trading, progress on its Energy from Waste contracts and net debt position.

Further to our 14th September trading update, our trading in the third quarter has seen a slowdown from that reported in the first half. In UK support services, this was driven by the continued employment cost pressures in the business, the cost of contract mobilisations, margin deterioration driven by a cost base which has not been flexible enough and contract performance in the justice business. Our UK construction business has seen further deterioration in operating profit as challenging market conditions and cost pressures as well as operational delivery issues have continued to impact performance. Our equipment services business is performing well and as anticipated, the international support services business has started to improve versus the first half performance and in international construction we have maintained a stable performance.

We now expect operating profit for the overall group in the second half to be approximately half the level of that which was reported in the second half of last year.

Additionally, further progress has been made on the Energy from Waste contracts in the quarter, but we have seen a slippage in the anticipated completion date for some of the contracts and we now anticipate, in addition to the £160m provided in 2016, an additional £35m provision is required and significant uncertainty remains on the timing of commissioning. Based on this provision, our additional net cash outflow for the rest of the programme is expected to be £35m. The attached schedule provides more clarity on the scope of our exited Energy from Waste business.

Taking all of these factors into account, we now believe there is a realistic prospect that we will not meet the net debt to EBITDA test contained in our financial covenants for 31st December 2017. As previously announced, we are engaged in constructive and ongoing discussions with our lenders. We have engaged a financial advisor to assist us in these discussions, as well as looking at options to maximise the short and medium term cash generation from the business.

The company is launching a group wide performance improvement plan, Fit for Growth, aimed at improving margin performance to industry norms. As part of this, we have initiated a series of work streams to address our operating model and the cost base of our operations, as well as ensuring that we are operating in market segments which are both profitable and offer opportunity for growth. We have also initiated a comprehensive contract review across both the support services and construction businesses.

Work winning in the quarter has been strong with the order book standing at £7.4bn. Recent contract wins include: Department of Work and Pensions, Magnox, Department for Transport, Ministry of Justice, Durham University, Dandara and Liwa Plastics (Oman). Retention also remains strong providing a stable platform for 2018.

Debbie White, Chief Executive, said, "Despite our challenges, Interserve has a strong client base and many strengths as an organisation and I believe there is considerable potential for business improvement across the company. My team will focus on improving our margin performance in UK support services and ensuring good contract selection in UK construction, while reducing our cost base across the company".

ENDS

Interserve chief executive Debbie White and chief financial officer Mark Whiteling are hosting a call for analysts and investors at 08.30am this morning to discuss today's announcement. Participant dial in details:Dial in number: +44 3333000804PIN: 95717429#URL for international dial in numbers: http://events.arkadin.com/ev/docs/NE_W2_TF_Events_International_Access_List.pdf 

For further information please contact:

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

Michael Kinirons, CNC Communications +44 (0) 203 219 8816

This announcement contains inside information.

LEI: 549300MVYY4EZCRFHZ09.

Classification: Inside information

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SCHEDULE:

* Defined as completion of construction activity by Interserve Construction Limited. 

Commissioning activities may continue beyond these dates.