Welcome to the CIRCO 2019 Half Year, Results. My name is Rupert Stomes, and I am Chief executive. And I know this is a very busy day for you all. So, we're going to try and raffle through, but I do want to spend time if possible with Kevin Craven, who runs 40% of our business runs the U. K.
Business, and he's going to give a specific exception on the U. K. Business. So it's been a good first half Actually, please, for the first half, it's been building on the inflection point that we saw in 2018, good trading and financial performance revenue up 6% at constant currency, of which 4% was organic. This is the 1st period since 2013 that we've actually achieved some organic growth.
Underlying trading profit of 51,000,000 up 29% of constant currency or 25%, excluding the beneficial impact of IFRS 16 on the underlying EPS up 35% and free cash flow by a Nat's Whisker turned positive again for the first time since 2014. But strikingly, a very, very strong order intake in the, first part. 1st part, 1,000,000,000 of order in take and 2019 will therefore be the 3rd year in a row that order intake has exceeded revenue. The order book has now increased by $14,000,000,000, and that's up $12,000,000,000 from 6 months ago and $11,000,000,000 12 months ago. On NSPU, the acquisition of the Naval Systems business units that we announced earlier on in the year, we had, I think, had it in our mind that that would close, and complete the transaction sometime in mid September.
I'm glad to say that, the regulatory consents have gone faster than we thought that they would, and we expect to complete that transaction, imminently. In terms of our balance sheet, it is not only robust, with underlying leverage 1.37 times EBITDA. It is also, I think, pretty clean. Adjusted net debt was slightly better than was expected at 201,000,000 on a pro form a basis. And in terms of a clean balance sheet, 87% of our UK suppliers are paid in less than 30 very good for the industry.
We don't use any working capital facilities. Our pension schemes are well funded and there is no refinancing required in the near term. Our revenue for 2019, remains unguided from that unchanged from that that we announced at our preplays, update. And I'm delighted to say that the mobilization and transition of our 2 large, new contracts that we won in the first half being the asylum seekers contract in the U. K.
And National Garrison Health in Australia is proceeding very well. If I can just put our guidance for 1,000,000 of profit, for 2019 That's UTP after the impact of, IFRS 16 into context. You'll remember one of my least favorite words, which was Nadia, the Nadia of our fortunes being, in, FY 'seventeen when we made $69,000,000 of, UTP and, a margin of 2.3%. We increased that to 1,000,000 last year, but within that, and we were very lesson about this time, there was about 10,000,000 of, nonrecurring trading items within that 93,000,000. And On a like for like basis with the 69 and the 93, we think that we will make, around 100,000,000 in 2019 or 105,000,000 after IFRS 16.
And that represents a compound growth over that period of some 20%, which is kind of what you might expect of a company coming out of it's bad times and beginning to grow again. So despite an overall weaker market, our very strong order intake means that we believe that Circa will still be able to outperform for the market for at least the next 2 years, and we expect to achieve organic revenue growth of 4% in 2019 accelerating to 5% in 2020 as contracts such as, Clariant, that's graft and prison ASC and MGHS become fully operational. And as these come, become operation that should support margins continuing to increase, and therefore, the potential for further strong profits growth, Angus.
Good morning, everybody. Let me take you through the financial
section of
the interim results. Let's start with the income statement. Revenue of 1,000,000,000 is up 8% on a reported currency basis, which is 6% on a constant currency basis. The 6% comprises 4% organic growth and a 2% contribution from acquisitions, mainly Caribbean Health in the UK, which completed during the third quarter of last year. The favorable currency impacts of million in revenue and $2,100,000 in UTP arose primarily from the weakening of sterling against the U.
S. Dollar, from a first half average of 1.38 in 2018 to 1.30 in the first half of twenty nineteen. All the rates are in the appendix together with the impact of from the contract and balance sheet review were small and netted to 0. On a comparable basis, to remove from UTP, the one point 6,000,000 benefit of IFRS 16, the new leasing standard. UTP was 49,000,000, representing growth of 30% The UTP margin pre IFRS 16 was 3.3%, a 50 basis point improvement, largely due to strong performance in the US.
Breaking down the revenue performance by division, The increase in revenue was driven by the Americas and Aspect. In the Americas, the 15% increase in organic revenue in the period was against a weak comp of a 12% decline in the first half of twenty eighteen, which back then was largely caused by As you'll remember, our U. S. Defense revenues improved in the second half of last year, and this momentum has continued through the first half 2019. Aspact revenue similarly maintained its strong second half performance last year, into the first half of twenty nineteen.
This was driven by several contact center and processing support contracts with customers such as the Department for Human Services, National Disability Insurance Service and the Victoria Police The 3% organic decline in our Middle East division was largely due to the revenue reduction of the on the successful rebid of our Milab's contract. Revenue in the UK and E grew 4% With this growth comprising 5% from the Corillian Health acquisition, which continues to perform very well, partially offset by a 1% organic decline. Kevin will touch more on the UK and EU later. Overall, group revenue grew by 8% or 1000000, with, for the first time, since 2013, an element of organic revenue growth which accounted for around half of the increase. This 4 percent or million of organic growth was supplemented by 1,000,000 of growth from acquisitions and 1,000,000 from ForEx.
Turning to the analysis of underlying trading profit. For the group as a whole, 1,000,000 of UTP represents a period and period growth of 29% in constant currency, or 25% excluding the 1,600,000 IFRS 16 effect. This growth was almost exclusively driven by our North American business, which had a very strong first half. We saw profit improvement across all our business units in North America, where the standout performer was the recently rebid CMS contract, which saw a re phasing due to the fixed price unit price fixed unit price structure of the new contract and volumes weighted to the first half. Is as we look forward, it's unlikely that the unusually high volume of variable work that we had in the first half will repeat in future years.
The new contract is more fixed price in nature, and we have reduced costs materially through the introduction of robotic automation. A large element of which benefits the customer in terms of materially lower transaction costs. This performance has led the underlying trading margin in North America to grow from 6.3% in the comparable period to 10.1% in the first half of twenty nineteen, but we expect it to swing back to around percent margin in the second half. UTP in Nasdaq was modestly down, which included the mobilization and transition cost associated with our National Gas And Health contract, which successfully went live on the 1st July. Similarly, in the UK division, where the profit growth arising from the Curlian Health acquisition was diluted by the transition and mobilization cost of ASC as well as a slightly lower level of profit from AWE.
In the Middle East, as previously flagged, underlying trading profit and margin reduced significantly, in large part due to the margin reset arising from scope changes, in the relabs contract. Corporate costs grew by 1,000,000, which reflects both timing and also some ongoing investment in areas such as IT And Compliance And Assurance. Overall, group margin improved from 2.8% in the first half of 'eighteen to 3.4% in the same period in 'nineteen, maintaining the margin momentum we saw for the first time in 2018. Turning to the bottom of the income statement, The increase in net finance costs was due in large part to the 2,200,000 increased interest payable arising from the adoption of IFRS 16. This was compounded by the 1,900,000 reduction of interest receivable as a result of the repayment of the IntelliNet loan note last autumn.
The blended cost of our private placement in bank debt was 4.9% similar to the 4.8% of the prior period. The underlying tax costs was $9,800,000, down from $10,600,000 in the prior period. This reflects a decrease in the underlying effective tax rate from 34% in the first half of 'eighteen to 24% in 'nineteen. The effective rate is lower due largely to the improved profitability and mix, including a lower level of UK losses, which we are not yet able to take a tax credit on. Which is why the effective rate still remains higher than our blended country corporation tax rate.
However, Given the improving outlook in terms of tax asset already recognized with a further million of contingent tax asset, which we can recognize in the future as the outlook for UK profitability improves. Further detail on tax is given the Appendix 7. I will cover exceptional items in a separate slide in the moment. Underlying earnings per share grew by 42% from 1.84p to 2.62p, reflecting the reported 35% increase in underlying trading profit and the lower effective tax rate. Reported earnings per share, which reflects non underlying items and exceptions, was a loss of 0.15p, compared to a profit of 1.3p in the prior period.
The weighted average number of shares an issue was slightly higher at 1,146,000,000,000 given the timing of the NSPU related share price placing. As previously indicated, the board has not declared an interim dividend for 2019. The board remains committed to resuming dividend payments when it's prudent to do so. Which will take into account the appraisal of future financial It is worth noting that full year 2019 is the last year of significant OCP and exceptional cash outflows and that the board keeps the dividend policy under careful and regular consideration. In terms of exceptional items, These were a net 1,000,000 as compared to 1,000,000 in the prior period.
The biggest element related to the serious fraud office investigation which concluded with a deferred prosecution agreement and of which circa will pay a fine in costs totaling 1,000,000. This has been charged to the income statement in H1 as a post balance sheet event and will be cash settled in H2. The restructuring costs of $5,400,000 that were incurred relate to the elements of the final year of our transformation program Notably, the outsourcing of elements of our procurement process. With respect to the full year, we expect restructuring costs to be around 15,000,000. Going forward, focus will move from transformation to operational excellence and delivering efficiencies in the contracts from the implementation of workforce management and improved procurement The exceptional costs related to the NSBU acquisition were 1,700,000 in the first half.
The cash outflow related to exceptional items was 1,000,000. In terms of the full year, we expect exceptional cash costs in the region of 1,000,000, around half of which will relate to the conclusion of the SFO investigation. Turning now to cash flow. We have, for the first time, in my tenure, a positive, as Rupert said, albeit barely registerable free cash flow inflow for the first time of not $400,000. You noticed we didn't round that number.
We gave you the bullet the point. This compared to an outflow of 1,000,000 in the first half of twenty eighteen, which has an IFRS related restatement of $5,000,000 for the capital repayment of finance leases, which were previously recognized below free cash flow. For half year twenty nineteen, the cash flow has some new IFRS 16 lines to it. There is $29,400,000 of depreciation and impairment of newly recognized lease right of use assets. There is then the role that's titled capital repayment of lease liabilities, which together with a finance element running through net interest paid, represents the actual cash flow on all these liabilities, I.
E, finance and operating leases together. It is worth remembering that despite all these IFRS 16 items, it has absolutely zero impact net cash flow, and it's merely a presentational change. The shift to positive free cash flow was generated through improved profitability, Utilization of receivable financing was Nil, and we no longer have a receivable financing facility. Also, we don't use any point any form of payables factoring. The working capital outflow in the period was 7,500,000 and our average working capital days were broadly unchanged.
Capital expenditure for the half year at 12,000,000 was lower than the 18000000 in 2018, but we still expect CapEx to be in the region of 1,000,000 for the year. From a net debt perspective, there are added complications of the equity placing and IFRS 16. Net debt at the end of the 1st half is presented on a pro form a basis to exclude the million net proceeds of the placing, as these will flow back out again in the second half on completion of the NSPU transaction. We have also introduced a new measure called adjusted net debt to exclude all lease liabilities. Including previous finance leases, as IFRS 16 makes no distinction between finance and operating leases.
The prior period numbers have therefore been restated to exclude the 1,000,000 of finance leases that were previously included in net debt Pro form a adjusted net debt at 30th June 'nineteen is 201000000 which is similar to the GBP 205,000,000 in June 2018. The increase from GBP 173,000,000 at 31 December 2018 reflects the previously discussed exceptional cash outflow of 12,000,000 as well as a 9,000,000 acquisition outflow in respect of our 10% shareholding in the SPV for the Clariant's correctional facility in Australia, formerly known as Grafton. Daley average adjusted net debt for the period of 1,000,000 was 1,000,000 higher than in 'eighteen, very similar to the movement since 1,000,000, which was 1,000,000 higher than the prior period in 2018. Our debt covenants remain in a pre IFRS 16 basis and therefore are calculated based on the previous GAAP definitions of finance and operating leases. Post the covenant adjustments highlighted in Appendix 10, our net debt to EBITDA leverage ratio is 0.43 times, which includes the proceeds of the equity placing.
Excludes the OCP net releases in the second half of twenty eighteen and ignores the impact to the placing. Leverage was 1.37 times, By the end of the year, we expect underlying leverage to be closer to 1.5 times, which will include the impact of acquiring NSPU. This number is in the Okay, the slide that everybody's been waiting for, IFRS 16 on leases. We set out in February the background and estimated effect of adopting IFRS 16, you should therefore already be familiar with the top 2 thirds of the slide. However, the first point I'd like to highlight is that the estimated impact on our 2019 result remains broadly unchanged from what we said in February.
That is, UTP and net finance costs will each increase by around 5,000,000 and therefore, approximately net out. In terms of the first half, there was a 1,600,000 benefit to UTP, and a 2,200,000 increase in net finance cost. It is also worth reiterating that the property leases associated with AAC will have a bigger impact as we go through the second half. And most particularly in 2020. And we will give further details as the lease portfolio takes shape.
As if IFRS 16 wasn't complicated enough, when you add OCPs into the equation, it takes on a life of its own. For example, with respect to caledonian sleeper, the right of use asset that would have been recognized during the first half for the first tranche of our new trains was immediately impaired by $12,600,000 because the profits in this contract couldn't support the asset value. This impairment took the form of an accelerated utilization of the OCP, meaning that the remaining OCP is smaller, but there is now a new lease liability of the same amount. Importantly, it should be borne in mind that this does not change the cash profile associated with the Caledonia sleeper contract, with the cash outflow previously associated with the OCP now being again both the remaining OTP as well as the capital elements of the lease liability and associated interest. It's probably worth saying at this point that if you want more on IFRS 16, Professor Nigel Crossley at the back, and his finance and accounting team are very happy to run tutorials, at the end of this session.
Now If like me, you crave for a set of circle results where there's no mention of the 2014 balance sheet review in OCPs, The good news is that we're almost there with the remaining OCP balance of $26,700,000 at the half year. However, as we just discussed, there are IFRS 16 impacts on OCPs, totaling 25,900,000 And that is the combination of 13,300,000 opening adjustment and the 12,600,000, a accelerated utilization of Caledonia Sleeper adding this 26.7, adding this 25.9 26.7 of the remaining OCP means that from a future cash outflow perspective and loss making contracts, There's still $50,000,000 to $55,000,000 to go. Of that $15,000,000 to $20,000,000 will occur during the second half of this year. A further 1,000,000 in 2020 and an aggregate of 1,000,000 to 1,000,000 thereafter. Overall, the good news on our loss making contracts is that having started with 1,000,000 of liability and cash drag, where within sight of the finishing line.
Finally, let's look at the outlook and modeling assumptions. The guidance on this slide excludes any benefit from the completion of NSPU, other than the impact of the acquisition price on of net debt. All conditions have recently been made that enable the acquisition to complete imminently and we expect approximately 5 months of NSBU revenue and profit will be included in the year end results. We expect revenue for the year to be around 1,000,000,000, partly reflecting a small favorable currency movement based on current exchange rates. We continue to 18, which is broadly offset by higher net finance costs.
As we head into the 2nd half, we must bear in mind that growth will be muted given the H2 benefit we had last year of 1 off nonrecurring trading items, such as end of contract settlements as well as the impact of not having CMS variable work that we had in the 1st half with profit and margin reverting back to more normal levels. We expect net finance costs to be around 20,000,000 which includes the estimated 5,000,000 from IFRS 16. In terms of tax, we expect an effective rate just below 25%. The weighted average number of shares an issue was expected to be 1,145,000,000,000 as a result of the NSPU placing and additional 111,000,000 shares were issued in May, which increases the weighted average number of shares an issue for 2019 to 1,000,000,000. Guidance for exceptional restructuring costs is around 1,000,000 as we conclude the final year of the transformation stage of our strategic plan implementation.
We expect to generate free cash flow of between 1,000,001,000,000 compared to 1,000,000 in 2018. In February, we guided to adjusted net debt of around 1,000,000, which consisted with our covenants a excludes newly recognized IFRS 16 lease liabilities. As stated at the time of the NSPU acquisition, we now expect adjusted net debt to be around 1,000,000, with underlying leverage increasing to approximately 1.5 times, of which what some 0.2 times is due to the impact of NSPU. With that, let me hand back to Rupert.
For those of you who are aware of my cast, as a disc jockey or beware that one of the great secrets of the art is segwaying smoothly from one mood to another. And on that basis, I'm going to start with low lights first before segueing into the highlights. But you will notice on our low lights, page that the acreage has had to change somewhat. We used to be about fifty-fifty, low lights and highlights, but we're now down to 1 third low light supply. We'll start as always with, them.
Firstly, I'd like to refer to is that we've obviously had some quite severe difficulties with the delay in the introduction of our new sleeper running stock, I have to say that the actual running stock itself is magnificent. But, it has been like going in a single leak from a bakelite phone to an iPhone. There's much, much more technology in it The trains were delivered late, and we went into service probably too early. Anyway, it is now running well on the lowlander. We are achieving very good punctuality, on that and those people who are traveling on the new trains are really enjoying it.
So I am confident that that over the next few months. We'll get that as we roll out the, highlander. We got that back under control. So staying in Scotland, we have been, beset by continuous continued difficulties around some 300 Compass, overstays. That's asylum seekers who we have been looking after.
Way after the home office support is continuing. I'd have to say this is an example of the road to hell being part and parthed with good intentions. What started as us giving, a few asylum seekers, a few months extra after they've had their claim refused to go and make alternative arrangements and find their way back to their home countries has turned into some three hundred people overstaying of whom the average stay overstay is now knocking on a year. It is an intractable and difficult problem, but we will work our way through it. We are taking various elements of action to reduce that number.
And over time, it will reduce, but it is politically very difficult in the highly charged. We still see, continued very high levels of prison violence, in the UK. It is striking how different the levels of violence in the UK prisons are from the, Australian ones. But I am glad to say that in the recent, MOG, Mr. Justice rankings of Prisons are private Prisons as a whole, and particularly the Circo prisons came out very well, out of that.
There are some indications that the trend in advance is beginning to reduce. But again, this is a problem that will take some time to resolve. In terms of the delivery of our the new ice breaker to Australia, we're now very tight on the delivery of that. I don't think see that as having, any great financial consequence for us because we are on a fully pass through basis with the manufacturer, but they are scrambling to keep up to the timescales. And we will have to see how fast we can sail from Romania down to Hobart when the ship is finally delivered.
There's a very tight labor market in the, U. S. I know there's been a lot of traffic back in the U. K. Where U.
K. Were yes, it's it's quite tight, but it's it's it's fine. Kevin can talk more about that. But in the U S, we're into the kind of stage and I were welders are being paid like investment bankers, or shall I say analysts? Particularly for key skills.
And as you'd expect, the Navy is very busy. The implication for us is more that we could grow our revenues faster if we could get ahold of more labor because a lot of our contracts there are in the, our cost plus rather than one being it easing our margins, but we, as I say, key skills are hard to combine. The pipeline now is down to 3,200,000,000, which is not really unexpected since we have taken 3,300,000,000 of order and taken the in the first half. And I think we will replenish it quite strongly in the second half. We've got quite a lot that is on the verge of the pipeline.
But we would, we want to see it start to grow. And in the UK, you'll all be aware of the political situation. We, clearly the government is now highly focused on, Brexit and getting Brexit done, all the government is a phenomenally powerful machine when all the when all the fish point in the same direction and they are now all pointing in the same direction. So this continuation of having to focus on one particular theme and finding a difficult focus on others is, I think, going to continue for a while, and as Kevin will explain, we're actually not badly placed in that environment because actually we do non discretionary, stuff. It's more the discretionary projects that are being delayed.
Right. In terms of the highlights, we've talked about the UTP progress and the acquisition of, NSPU, I would say it was particularly pleasing that, when we did the equity pacing, it was one of those rare birds where we placed at a 5% premium to the previous night's close. And I'm glad to say that everybody who bought stock in that Everybody's gone away from that party with a balloon because we are, nearly 11% up since the placing price. So that's, a good news. In terms of the order intake, we talked about the asylum seekers and the, defense, Garrison, Healthcare, But I would also point out that there's been a lot of other action, the U.
S. Pension's Guarantee Corporation, in terms of providing, what is the equivalent of the, the institution that handles and administers failed pensions, operations in the U. S, the U. S. Tririga Air Force Next Gen IT, which is highly technical asset management for the Air Force.
We've won another prison in the form of Adelaide Romaine Center, and we are now picking up shortly. We'll be picking up her majesties and the former prime minister's dust bins since we are doing environmental services in Windsor and Maidenhead. And there's been a lot else in particular, our contract with FEMA, the Federal Emergency Management, Administration where when there's, floods or hurricanes, some natural disaster in the UK, we have a section of the country that we look after and that is now ramping up very significantly the, the, minor business there. And I'm delighted to say that, yesterday, we announced say, further, a contract for extension, what, re bid for some GBP 100,000,000 of the traffic camera services in Australia. So there's still momentum behind, that.
Angus has talked about the OCPs being on track with some 50,000,000 to 55,000,000 left to go against the 147,000,000, that's 50,000,000 to 55,000,000 of cash outflow, against the 447 that we announced in 2014. So as he says, we can see light at the end of the tunnel. The U. K. Government has tried really hard.
And actually, they've done been extremely, diligent and have done a good job in recognizing that the ground rules for contracting the public sector needed to be changed. There's a new playbook. It's early days yet. Very early days. It'll take some.
It'll take years to properly get, implemented and become a way of life for government, but the intention is that. And there are other things that, I'm pleased about. It looks like, Circular Eye State is becoming something of a talent magnet. We, decided to introduce a graduate program in the UK. We had a thousand people apply onto our website, six hundred people went through and did the, tests.
We had some seventy five people who exceeded on the test, the level required for Treasury Fast Track, Acceptance and all this for 12 plays. So I think that we are an attractive employer, particularly for young people and what they see is our commitment to making a positive difference in public services. In terms of operational excellence, If I should die, think only this of me, that, circle by, the autumn will have core SAP ERP system on latest version are running in the cloud and a complete Office 365 implementation, worldwide. And that is, I have to say, most companies don't get anywhere near that. Most of our trading was we were trading on version seven, eight years old and we buy the end of the year will be have a absolutely current version of SAP.
And I think that that puts us in good stead in terms of being able to run the system securely and efficiently. And finally, I'm delighted to say that we were able to draw the veil, over, are, issues with the serious fraud office and come to settlement of that. Though, but clearly, we are continuing the, to maintain the very, very high degree of compliance assurance that you would expect for a company such as ours. And we also came to an amicable settlement with the Ministry of Defense around our defamo dispute. A few words on the order book and pipeline progress.
If you just look at that top graph, you'll see that, we've got an order book of 1,000,000,000 which is, compared to 1,000,000,000 that we had in FY 'thirteen. The difference is that within the 1,000,000,000 of FY13, there was over 1,000,000,000 of contract subsequently turned out to be unprofitable. Whereas we believe that other than a stub of remaining OCPs within our current order book, which is mainly sleepers and, the Des in Canada, that our 14,000,000,000 represents contracts that we expect a bad sometime in their lives, but it's a much healthier position, and it is a large order book relative to our, our revenues. In terms of the, pipeline, the pipeline represents, only about half of our order intake. Over, that we get because we define it.
The forward definition of pipeline is extremely strict. And as I said, generates about half of our order intake. But we need to rebuild it, but I think that we will be able to do so. In the, SPU acquisition for $225,000,000. It's got world class capabilities and ship submarine design, production, engineering and service support, it takes us right into the core of U.
S. Navy design, at the time when the U. S. Navy is constantly is committed to a significant increase in the number of ship in the Navy and we also have to say our colleagues around the world both in the UK and in Australia are very are very keen to start using the skills that we have in Align. And at that point, I'm going to hand over to Kevin Craven, Kevin joined the business in September 2014.
I think you were about my first recruit, pretty much. And He's had vast experience in the turnaround. He has taken the heat and burden of the day of the biggest turnaround in our business where some of the most issues were the most in, trapped school. In tract support, he started running our central government business And in 2017, you took over the whole of our UK business in terms of the local government. So Kevin,
Thank you, Rupert. And may I say what good judgments you showed in hiring me 5 years ago. Good morning everyone. So I'm very pleased to say that this is the year that the division begins to look like a proper business, both growing and delivering positive cash. I know you're relieved by that, but not as much as I am.
To remind you of the size of the business, in 2018, we were at 1000000000 of revenues, our shares and joint ventures added around a further 1,000,000. Those revenues together delivered about 1,000,000 of underlying trading profit at 3% margin. The majority of the business as you would expect is in large contracts. 75 percent of the revenue in just 35 contracts and we have some 24,000 employees. You already know most of our client base and can see some of them on the screen.
So I'll just pull out a couple of them that are further up the technical value chain. For the European Space Agency, we do both space operations and data analysis. For CERN, the nuclear research facility on the Franco Swiss border We do the maintenance on the cryogenic operations there, essential to the successful operation of that facility. We also do pathology and laboratory services at Kings And Guy's hospitals through our Via Path JV. And of course, they're technically very difficult in challenging prison operations, where I'm very pleased to say, as Rupert mentioned, that we were awarded either good or very good across all of our English prisons in the MoJ annual prison performance announcement last week.
Also pretty good strategically was our 1st European defense contracts last year in Italy and Belgium. Only small but we will be bidding a further 5 military bases in Belgium soon. So as you can see from the pie chart, the mix of the business across the 6 business units, 5 sectors, and we manage Europe as an additional geography is pretty evenly spread with defense, including AWE, the biggest and Europe the smallest. So turning to the half year results, we have had a strong operational performance and we continue to improve on the financial. The year is clearly an inflection point for us as we start to outpace the drag from the onerous contracts that have dominated previously.
Some revenue growth, 1,000,000 up, mostly from our successful health care acquisition, but some organic such as our new basingstoke and Dean Environmental Services contract and the employment and skills win, but offset by the exit from the OCP contracts at East Kent Hospitals and the onerous elements of the anglia support partnership which we disposed of. Our underlying trading profit was up by 3% and we've held the margin flat despite continuing to invest in our skills, capability and compliance. We had expected some reductions in this first half particularly from AAAC now in full mobilization and transition mode, and the 3 year pricing period for AWE, but those have been offset by the Carillion contracts and other health care improvements as well as our ongoing efficiency programs. So the OCP utilization was down by about 1,000,000 at half year and is a expected to be only 1,000,000 at the full year, then further reducing to less than million for next year. To tremendous progress given the million worth of pain we had in 2015.
So we are expecting the second half of the year to be much stronger and shifting to positive organic growth with something like a 4.5 percent margin in the second half, which should get us to around 3.5% for the year and therefore, up 50 basis points year on year. So I do like this slide, at 41% of the group, 45% if we include Europe, we have a can contribute to the group's fortunes. Up at the top, we are showing the revenue profile to managing this business declining by 36 percent over the years up to 2018 has been pretty hard and finding the headroom to invest in improving the much needed systems, processes, capabilities and people was tough, but we got there and distinctly turned the corner last year. As you can see from the underlying trading profit margin on the bottom section. We are anticipating eventually getting closer to our 5% to 6 percent margin aspiration, and shows the profitability in and visibly coming towards an end.
It might be a little bit fanciful, but if you squint at these bottom two sections, it kind of looks like a smile and it may be that I am slightly ever so slightly biased. In Moving on to the operational sharp ins, Rupa talked about the Caledonian sleeper. We are making real progress on the new rolling stock implementation. And those of you who've been lucky enough to travel with us in the last couple of weeks on our low lender service, will have enjoyed the real step change in facilities and comfort, as our passengers clearly have since volumes are up 9% year to date versus last year and continuing the trend since we operating, we started operating the franchise. We are up 24% since the beginning of that franchise period.
So as you know, the OCP increase in 2017 due to that delay in the rolling stock. However, it now drops significantly. We are trading within expectations and looking forward to April next year when the losses will be much, much smaller and transport Scotland will bear 50% of any of those remaining losses. It's probably also worth reminding you that in 2022, we can adjust our pricing to Transwood Scotland they can choose to accept those prices or we will or we will exit. So if you haven't tried it, you should.
It's a real experience now. So talking of OCP's compass with an enormous OCP in 2014 is almost over. We are in the middle of transitioning to AASC in the northwest already, and we start transitioning the Midlands and east of England today. Would be formally done with the Compass contracts which had revenues of around 1,000,000, losses of around 1,000,000 per annum on 30th September when we hand over Tamir's in Scotland and can concentrate on the new contract with double the revenues and 20,000 asylum seekers in around 5000 odd properties. We will be the largest supplier in this marketplace going forward.
Importantly, the new contract has been improved both for our service users, but also reduces Circus risk with volume caps, greater gradation of volume charging vans and protections against surge events. As well as much improved inflation mechanisms. Both of these are challenging complex contracts but we are making good progress and are on track to deliver. So I did want to pick up on 2 areas of operations that we don't often talk about. The first of these is space and security where we have a range of capabilities and services, but also see quite a lot of opportunity as the sector grows on a global basis.
That capability extends from circles very first contracted filing dales in the late 1980s, where we have supported both the ballistic missile defense infrastructure but also do the space traffic analysis. And over to the Capernicus Earth observation satellite program for ESA where we provide the data and information access services through a web portal called Onda So this diagram shows some of the many touch points we have in this growing area and some of the opportunities. So over at Vandenburg Air Force Base in California, that's where the UK, Australia, and Canada joined forces with the U. S. For command and control functions integrating Space And Military Operations.
The U. K. Version of that is the joint National Space Operations Center, and up the top in Scotland at Sutherland, you can see the site for the U. K. Vertically launch spaceport.
These are the types of real and current opportunities In the direct technology space, we have a small business that is, for example, supplying test equipment for the Looft buffer amongst others. And finally, at the Emergency Planning College, this is a go code with the Cabinet office where we provide emergency and resilience training for the civil authorities. This is probably one of the few places in the UK that has benefited from Brexit thus far. So finally, I wanted to touch on a little known gem inside Circo, the experience then We separated this operation out from the National Physical Laboratory many years ago and it designs people centered services and digital solutions, both internally and for external clients, including I might add Google and Facebook. But we have seen great outcomes in health, particularly where they have designed and delivered Circocares.
This is a cultural change and patient support program that has been massively well received by our clients and frontline medical staff as well as impressing academia as the quote shows. This is Circo at its very best And we think Circocares has huge applications in other areas of our business where we support vulnerable people. They also had a hands in perhaps a more relevant example for organic growth at a contract level. So down below, we are looking at the new patient discharge suite where we designed and built an extension at Norfolk And Norwich University Hospital that specializes in taking patients ready for discharge from the wards early and then manages the all the admin medications and transport before they leave hospital. This enables the hospital to get back beds and staff much sooner and alleviates a lot of the patient frustration in hanging around waiting for staff to support the discharge.
Just moving on to the pipeline, currently, this is the externally defined pipeline which is reasonably healthy and spread over all of our sectors. Just outside the pipeline, we mentioned prisons where there are 2 new build Prisons, Wellingborough and Glen Parver coming into the pipeline very soon, but we also have the Gatwick Immigration Receiving Center in JNI, which is a bid we're in the middle of right now. And we are in defense partnering with ENGIE on a number of defense infrastructure opportunities, both in housing and base support. We also have a maritime infrastructure opportunity down in Portsmouth, and of course, health is generally a very liquid marketplace with a number of opportunities in their fare. So this picture obviously excludes rebids and extensions, but probably worth noting the PECS contract prisoner escorting, which is underway at the moment, it is currently an OCP contract where the opportunity for cash and profit turnaround is similar, albeit much smaller than AISC.
The contract value of that is around 1,000,000 for 10 years in the new contract. So we are very much in good shape. Much of our transformation is complete and we're now focusing very hard and productivity and continuous improvement. We are every single year now training 500 yellow belts and 60 green belts and expect to have over 7000 employees in our complex contract environments under the new workforce management system by the end of the year. I am somewhat less legubrious than Rupert on the market and the environment, They do remain challenging, but we are seeing progress both in relationships and policy, and I should say and support Rupert in mentioning that the outsourcing playbook was a big step forward for the government, and we are seeing visible signs in some of the tenders that we are dealing with at the moment of those changes.
But there is real deal flow as you can see out there. A lot of what we do is not discretionary. Patients will still need care in hospitals. The Royal Navy will still needs to be towed out to 2C and asylum seekers will still need housing. And finally, we are moving towards growth.
We want to broaden our pipeline. We want to build in our global centers of excellence in JNI And Health and we would love And if we In short, our market remains attractive, and we are well established to play.
Kevin, I'm done on Truckfit job. So the first half of 'nineteen has built on the inflection point that we, delivered in 2018, good trading and financial performance very strong order intake and our order book at 14,000,000,000 is a fine store of future value. Our NSPU acquisition adds materially to the scale both of our U. S. And our wider defense business and we have a robust and a clean balance sheet.
2019 for guidance for growth in both revenue and UGP remains as previously and the mobilization of our new the large new contracts is going well, at which point I will turn over to QMA, which will be moderated by Angus.
Down in the front here, please, Hal.
Hi, it's Paul Sullivan from Barclays. Just firstly, could you just give us a bit more color on the range of opportunities within the pipeline and beyond that you see outside of the UK? And could you give us a sense of the sort of the average margin average margin that you would expect was you currently see it within the pipeline and maybe that's sitting just beyond the pipeline. That's the sort of first question. And then just sort of following on for that, in terms of progress and timing of reducing contract costs, I think that's the sort of next leg of the margin improvement story, a little bit more sort of color and where you see and where you think you are on the road to 5% to 6% margin?
And then just finally post the U. S. Acquisition, where do you now see the strategic gaps in the portfolio? And how ambitious do you think you'll be on M and A going forward? Thank you.
So, Kevin, do you want to talk about contract costs?
Indeed. So as I mentioned around the yellow belts and green belts workforce management, these are examples of of the initiatives we're using to drive down those contract costs, I have set the team a target of a 1% margin improvements, I would expect to see that coming through in the next 18 months or so depending on the contract and the challenges we might have in those specifics. But as we build that operational excellence base, we get to 20% of the workforce being yellow belts, 5% being green belts, each of those will produce a big difference.
I'll talk a little bit about the pipeline ex the UK. At the moment, it's mainly focused in the U S. We have a large tender right to do all the air traffic control training for the FAA, we have numerous bids in with the Navy, And in particular, we have just won a place on what's called the 750 framework, which is a framework contract for doing a work on ships equivalent to similar to the Keynes contract that we already have, but we that is quite a big opportunity. In Australia, we have, at least we see coming down the pipeline, some more, prisons coming up for bid. And that is a major rebid of our, a target contract, are providing a naval services in Australia.
I think in terms of margin, they are where you would expect us to be. We try to bid in the sort of minimum of a 5%. We occasionally shave a little bit beneath that, but from our point of view, it is, an issue of risk and, reward. I would say that there's quite a lot hovering just outside the, pipeline. And in particular, Kevin mentioned that prison framework contract that others have, I think taken into that pipeline.
We haven't yet, done that, but that will be quite a large value to come in. Angus, do you want to add anything to that?
No, in terms of margin, we are. We were 2.3% back in 'seventeen. We added 100 basis points last year the consensus has allowed 30 this year and we will see that margin progressing next year as well. So are we going to suddenly hit a button and get there? No, but we are now on a progression where the margin is getting higher and heading towards that range.
In terms of M and A, yes, we still have an appetite that is one of the reasons why we went and did a significant proportion of the, NSPU acquisition with equity was to keep some dry powder and there is still a flow of opportunities. I don't think you want to confuse, us looking at stuff and actually doing stuff over quite a broad range, ranging from carillion health care contracts to NSBU in the Navy. And BTP that we've done and others that we've looked at. Don't want to confuse that with being, just being frivolous about it. Actually, we have a broad spread businesses.
We look at quite a lot But then we have quite a few businesses which could benefit from acquisition. So we have an appetite we are very focused on integrating NSPU, but that will not stop us looking at other stuff. Does that do it?
Good. Next question. Yes.
I'm Rachni Arjun from DEA Hambro. I have a couple of questions focused on the UK. After the outsourcing playbook was accepted by the government, are you seeing an improvement in terms from them or is it just dialogue at this stage? And have you seen an increase in propensity for local authorities to outsource? And lastly, is there been any change in the competitive backdrop when bidding for contracts versus 3 years ago?
Kevin?
Yes. I mean, on the first, as as Rupert mentioned, the competitive, the outsourcing playbook will take time to bed in, and we are seeing a number of tenders where there is no sign of the changes, that are encapsulated within that But on the other hand, I could call out the MOJ where we have seen, some changes and the dialogue around terms and conditions have been very much in line with the best principles in the outsourcing playbook. So it will depend on adoption by the individual departments and the pace at which it's appropriate for them to move. But I think it's a positive move generally for the market and generally welcomed by my colleagues in the industry. In terms of your second question, more propensity for local authorities, no, we are seeing a slight tendency towards more extensions, but that is a feature generally of the UK marketplace at the moment.
In terms of capacity of government departments whereby they perhaps are focusing on other things like Brexit they will then take an easier route to extend contracts then perhaps start a full scale procurement. And we are seeing that in the local authority marketplace as well, but not a greater share of outsourcing. I wouldn't say that is visible to us anyhow. And in terms of the competitive environment, some of the things that we do are very difficult and challenging, the prison framework for example, prison operators framework essentially over the next 10 years or so, there is a private sector prison that will be coming to market roughly at a pace of 1 per year. There are six places on that framework 3 of those are current prison operators.
So the competition has de facto become bigger in terms of the ability to operate and run those prisons in a challenging environment, I expect that the majority of those awards would go to current operators, but it will depend as always on the individual competition and the appetite for people, we are confident that we have a robust proposition and hope
to do well. I'll just add something to that. I mean, when you see the AAC procurement for asylum seekers, which was a GBP 4,000,000,000 government procurement, there was only one new player came into that market. So my general view in the both the UK market is the competitor density is probably less than it was that there are people being more choosy about what they want to bid for. But this is a sort of pendulum swinging and it, you know, will, I'm sure in time, come back.
And when people's, if, if companies in the market see other players being successful and making money serving the government, then that will attract new competition back into the market over a period of time. David.
Thank you. David Drew from Bank of America. I've just got one question for Angus on the free cash flow free cash flow guidance for the year. That seems to be, have, nudged up somewhat since we last heard from you. Was just wondering what's driven the change in expectations?
It's small moves in the areas, like tax is probably a little bit less than we thought. Working capital is looking a little bit better than we thought. There's nothing there's nothing materially changes as we go through it, perhaps CapEx a little bit lower. So you're looking at 1,000,000 or 1,000,000 different in a whole series of different lines. Julian.
Good morning. It's a question for Kevin. Where we talked about, your U. K. Business and the risk of a labor government, I think you were that was 2 or 3 months ago, and you were sort of relatively measured, I, you know, you thought that if you were involved in, in Mayo or power distribution, you'd be more at risk.
You've talked about delivering essential services. But even in some of your local authority areas like Waste Management, there's a sort of statue backing to that. But If you look at the commentary from John McDonald's on 2 or 3 weeks ago and talking about potentially having taking bin collection in house, some of those other sort of services, how is that perhaps shaping your thinking about what you're prepared to bid for in the UK over the next couple of years and how your sort of risk register has changed?
So I mean, one of the things that John McDonald said was that he won't cancel existing contracts. Which I think is something that is worth dwelling on because many of our contracts and particularly in the local authorities are fairly long contracts. So it may be that again, and there's a question mark about whether that includes extensions, but I would expect that to, protect us to some extent if there was a major political, move in that space. And generally, my view on the political environment is that any governments now will last 5 years. Typically, average contract life is closer to 7 And if there was a major policy announcement around this stuff, then, of course, we would have some impact, but would it mean that we have no business?
I don't believe so. So I am still reasonably sanguine about that, I think, depending on how he takes a an election platform into government and how easy it is to enact that policy will then depend on our response to it. We are fortunate in terms of our geographical spreads. And therefore, I would expect Rupert to very quickly transfer some of my business development budget overseas, pretty rapidly.
Steven. Hi.
It's Stephen Rawlissen from Applied Valley.
Two questions, if I may. Firstly, with regard to, one of the slides page 75, you refer that to the inflationary nature of your cost increase you can apply. Can you just talk a little bit about the 4% organic growth in the first half and how much of that might have been your ability to actually implement inflationary cost increases, particularly given some of the competitive environments that you face. And secondly, with regard to rebids, to me, like over the next 3 years, there's 300,000,000 dollars, $400,000,000 of current contract work to it to be rebid. Just talk a little bit about where is your current intention to actually bid those contracts and how you'd see that playing out?
So in terms of the I think there's a dynamic in our business around inflation and pay that is different to, many others, including in our sector, in that, as Kevin said, most of our contracts are long term contracts. And over 90% of them are either, have predetermined, indexation, in them, or price negotiation things, but that it's not as if when we, that we are competing each year to go and, in a competitive environment to catch up labor costs. So I think that we are reasonably well, protected. I, I don't off the hat off the top of my head know how much of our increase in revenue in the 1st year, in the last 12 months came from indexation, but let say it will probably be glavily somewhere around inflation, because that's what we tend to get on our, contracts anyway. The sorry, the second question about the $300,000,000 to $500,000,000 of rebid.
Yeah. Yeah. I mean, most of them, we will want to rebid. Some of them, we don't. And a lot of this, depends on the terms under which customers are that new contracts are, come out, but there are examples, and I won't go into them.
Won't name them where we have not been able to come to an agreement with the customer about a fair way of contracting And we have just said, right, we won't rebid, but the vast majority of them we, we would.
Any other questions? Well, thank you very much Thank
you all very much indeed. Kevin is here to be tied to a post and interrogated if anybody wants to him. I'll hold him down while you kick.
Sounds like fun rupee.