Right. Good morning, everybody, and welcome to the Circo 2018, results presentation. My name is Rupert Somes. I'm the chief executive. I apologize in advance that we've got quite a complicated presentation because there's a lot of ground to cover and a lot of issues that we want to, go through with you.
But there are sort of 3 big points I'd like to, make. The first is that these results today marks something of a turning point in our in in our business. We've had four and a half years of hard slog to get to where we are today, but the results for 2018, really do demonstrate, I think that we are on the road to becoming a more normal company, a company where OCPs are but a rumor rather than the daily diet. And where we can consider, doing things like paying dividends and where we can have a normal, balance sheet and that the tanker does seem to have Turn. Secondly, is that the market, what's going on in the market is quite complicated, and we're going to explain that to how we have how we see that, working out.
And the third, though, is although that the overall rate of growth in the market, we think, has dropped from what was 5 to 70% back between 20102014. That slowing down is really quite localized. To the UK market and notwithstanding, that drop, our strong order intake in the last 2 years with over a 100% book to bill ratio and then a very strong start to 20, 19 with our biggest order that we've ever signed and overall about 2 and a half 1,000,000,000 of order intake means that I think that we can look through a weaker market and whereas previously, we said that our aspiration was to grow at market level. We think actually from our current order book and assuming we don't have plagues of frogs, or any rebid disasters, we should be able to actually grow faster than the market, both in 2019 and in, 2020. Go into the, details of the, results.
You'll see them in front of you. I'm not going to go through every, line, but the notable thing about revenue was the, game of 2 halves, theory. We had a a 6% revenue drop in the first half and a 2.5% revenue increase in the second half. Underlying trading profit, up 40% at constant currency and underlying EPS up 55. A percent.
The important thing about the order intake in students. First of all, over the last 2 years, 80% of it has come from overseas, having said that, our biggest order ever was in the UK market, which was the, asylum seekers contract. And in the 1st 6 weeks of the year, we have already signed £2,500,000,000 worth of orders, which takes us to about 85 and book to bill for 2019 expected, revenues. We've been out our acquisitions are performing well, very pleased particularly with the, acquisition of the krillin health care, contracts and those are now performing well. And contributing to, a profit as is, BTP.
And our balance sheet is robust. And, it's not only robust, but I think you're quite safe. You say it's it's pretty clean. I mean, we are paying our suppliers in 30 days on our region, we are being paid by our customers in 29 days on our region. There's nothing in our, well, no working capital financing facilities in between to go and, disturb that, relationship we're down well down the bottom end of our target, leverage, range.
We've got 1 more year we think of cash outflows coming up in 2019 as the OCPs and some exceptional charges work their way, through, but we did have a positive free cash flow of 29,000,000 in the in, 2018. In terms of guidance for, the, yeah, and we'll go through that in, more detail, but we think now that we're going to be at the top end of our, previous range of 95 to 100 that we discussed in, December roundabout 100,000,000 to which there is 5,000,000 on top for IFRS, 16. But, actually, the the other thing, the bombarding is the that we think now we can get to 5 percent revenue growth in 2019. So looking at how that, translates itself into profit evolution. The fact is between 2017 the Nadia, and, 2019 where we expect to be.
We're headed for 20% compound growth over those, 2 years. And if you take the £24,000,000 difference between the 69000000 and the 93000000 for FY18. There's 4,000,000 of negative FX, impact, but then there's 10,000,000 of non recurring trading items, which actually means that that, progression from 17 to 19 is actually smoother than it looks. And as I say, is a very respectable 20%, compound growth rate, and we expect to, to have continued momentum into, 2020. At which point I'm gonna hand over to, Angus.
Thank you very much, Rupert. Good morning. We'll now go through the, finance review. Let's start, income statement as usual. Revenue stated in IFRS 15 basis and is usually measures include our share of JV profit after tax.
The prior year numbers have been adjusted for IFRS 15, but as stated previously, the impact is not significant. Revenue of $2,800,000,000 is on a reported currency basis and is down 1.7% in constant currency. Which comprises a 3.1% organic decline from net contract attrition, partially offset by a 1.4% net contribution from acquisitions, namely BTP in the U. S. And Curillian Health in the UK.
The adverse currency impacts of 65,000,000 in revenue and 4,000,000 underlying trading profit, or UTP, arose primarily from the strengthening of sterling against the dollar for an average rate of 12917 to 134 in 'eighteen. The key translational sensitivity remains the U. S. Dollar where a $0.05 movement in the 'eighteen average rate has a full year 2019 impact of some £40,000,000 of $23,600,000 for the net impact of our items arising from the 2014 contract and balance sheet review. The bulk of this relates to a 12,800,000 net release of OCP contract provisions, reflecting our continued progress in working through the remaining balance as well as the release of non OS OCP provisions that we took in 2014.
Which are no longer required. We've removed the benefit of these releases from UTP to ensure that we give you an accurate picture of true underlying performance. Despite the reduction in revenue, underlying trading margin improved by 100 basis points, to 3.3%, primarily reflecting our continued progress in reducing costs, as well as around 1,000,000 of non recurring trading as we discussed in September. G and A costs were $20,000,000 lower year on year. Reflecting our continued progress in reducing our overhead cost base as we continue to transform our operations.
Going forward, the focus will be in managing our labor costs more efficiently, continuing to embed operational excellence and optimizing procurement, which were currently in the process of transforming. The revenue decline was most pronounced in the Americas, where organic revenue fell by 5%, largely due to a reduction in volumes on our CMS contract. I have to say it was a little disconcerting to hear Rupert use a football analogy a second ago, but it was something of a game of 2 halves. With first half organic revenue falling by 12%, followed by half 2, increasing by 3%. Largely driven by improved volumes and ship modernization and anti terrorism and forced protection contracts.
The 4% organic decline in the UK and Europe was almost wholly caused by the end of the Glasgow Access contract, late in 2017, with the increases and decreases across the rest of the contract portfolio largely offsetting each other. This organic decline was partly offset by the acquisition during the attrition, relating to our loss making armodale patrol boats contract, as well as the half one impact of the Western Australia prisoner escorting contract. This attrition was largely offset by strong growth in our citizen services business, where we secured several contact center and processing support contracts These wins resulted in the Aspact business growing its organic revenue by 10% in H2, following the 11% decline in H1. The Middle East grew its revenue organically by 1%. Largely as a result of securing an airport fire and rescue service contract in Saudi.
For the group as a whole, Acquoise acquisitions provided year on year growth of 1.4% whilst currency accounted for 2.2% of the total 3.9 percent fall in reported revenue. Whilst organic revenue declined year on year, it is encouraging to note that the 6% organic decline in H1 turned to flat in H2. Which provides a platform for us UTP for the group of 93,000,000 represents year on year headline growth of 34% and 40% in constant currency terms. All the regions saw growth in their underlying profitability. Both in reported and constant currency.
UTP constant currency growth of 12% in the UK and Europe. Was largely driven by cost savings, including the benefit of consolidating the 2 UK and E divisions into 1. This led to an improvement in underlying trading margin from 2.6% to 3%. In the Americas, UTP grew by 30% in constant currency to $46,000,000. A strong focus on cost savings and contract efficiencies combined with the new CMS contract structure ensured that the impact of lower revenue was offset by improved profitability.
Leading to an increase in constant currency 27% with trading margin improving 100 basis points to 4.9%. This improvement in margin reflects the impact of the end of the loss making armadale patrol boats contract. The impact of our progress in transformation savings and other cost efficiencies as well as several nonrecurring contractual commercial settlements. UTP in the Middle East grew by 30 percent to $21,500,000, in large part, reflecting the prior year rail bidding costs and higher than expected profitability in the previous Milab's base support contract. Consequently, trading margin in the Middle East improved to 6.3% from 4.9%.
But remember, that scope changes in the Middle East, in the Milab's rebid and other contract changes means that profits in March nineteen will be substantially reduced. Ongoing cost reduction programs delivered further savings in corporate costs, with a reduction of 4 percent to 40,000,000. Whilst 10,000,000 of the improvement in profit related to nonrecurring items, The improvement in underlying profit during the year was encouraging and reflects the progress made in reducing the cost base of the business. Since 2015, over 120,000,000 has been taken out of our overheads and activities delivered through shared services. Turning to the bottom of the income statement.
The increase in finance costs was largely due to the reduction in the pension scheme credit, as a result of the bulk annuity purchase in 2017. In October 18, the Intelli Net business was sold to teleperformance triggering the £37,000,000 repayment of a vendor loan note and consequent exceptional gain in net finance costs to 7,500,000. This will reduce in interest income and the unwind of the fair value discount going forward. The blended average cost of our debt in 2018 was lower at 4.7% as compared to 5.2% in 2017. This reflects in part repayment of $30,000,000 of our more expensive private placement debt.
This rate benefit was offset by £50,000,000 increase in average net debt during 'eighteen. I'll cover tax and exceptionals in a moment. Underlying diluted EPS grew by 55 percent from 3.36p to 5.21p. Reflecting primarily the reported 34 percent increase in UTP and the lower tax rate. Statutory reported diluted EPS, which includes non underlying items and exceptionals, was 5.99p as compared to a loss of 0.76p in the prior year.
The weighted average number of shares an issue for diluted EPS purchase purposes increased from 1.12to1.13. 1,000,000,000. The board is not recommending the payment of a dividend in respect to the 2018 financial year. The board's dividend appraisal considers market outlook, financial performance, cash flow generation, leverage, and what is an appropriate level of dividend cover. Although the board is committed to resuming dividend payments as soon as it judges it prudent to do so, for 2018, we are mindful of the fact that 2019 is the final year of significant cash outflows related to historical OCPs.
And exceptional costs, which together will mean that net debt is likely to increase again in 2019, albeit modestly. The board will continue to keep the dividend policy under careful and regular consideration as we progress with completing the transformation and focusing on the growth phase of our strategy. Turning back to tax. The underlying tax cost was 21,000,000, giving rise to an effective rate of 26 percent. The underlying effective rate for the year is lower than the 35% of the prior year.
Due to lower UK losses in which we get no tax accounting credit and the reduction in the US federal rate from 35 to 21. The effective rate remains higher than the blended country corporation tax rates due to the absence of the accounting tax credit for the UK in year tax losses. However, given the improving outlook in terms of UK profitability, 20,000,000 of deferred tax asset is now recognized, up from 17,000,000 last year, with a further 151,000,000 of contingent tax asset, which we can recognize as the outlook for UK profitability further improves. Looking to 2019 and beyond, we expect effective tax rate to be below 25%. Cash tax paid of $11,000,000 during 2018 was similar to 'seventeen.
It is difficult to find anything positive to say about OCPs, but they have provided an effective cash tax shield over the past few years. However, as we reach the end of most of these loss making contracts, we will see cash tax increase to more normal levels. In 'nineteen, we expect cash tax to increase to around $25,000,000, primarily as a result of higher taxable profit in Australia. Largely due to the reduction in the tax shield from OCPs and the non repeat impact of a tax repayment in 'eighteen in North America. In terms of exceptional items, these were a net $22,000,000 in 2018 as compared to $25,000,000 in the prior year.
The key element of operating exceptionals related to restructuring costs arising from transformation, which amounted to 32,000,000 and included redundancy and other incremental costs of implementing this phase of the strategy. Among the other operating exceptionals was a 14,000,000 credit related to the reversal of a loan balance arising on a German disposal in 2012, testament to the persistence of our Treasurer over several years. Going the other way is a 10,000,000 exceptional charge relating to the Lloyds Bank High Court ruling, on the equalization of guaranteed minimum pension, the cash impact of which will be spread over 10 years. With respect to pensions, we have a pension accounting surplus, and on an actuarial basis, including this 10,000,000 increase, The deficit is only around $25,000,000. As highlighted earlier, the repayments of the Intelli Net loan note resulted in the gain of 7 point 5,000,000, which is included as exceptional finance income.
The exceptional cash outflow was 40,000,000,000, which which included $32,000,000 in respect of restructuring costs and the final $8,000,000 installment of the DLR pension scheme. We expect restructuring costs to be lower in 'nineteen at around $20,000,000, reflecting the advanced stage we've reached in terms of transformation. Turning now to cash flow. You can see the breakdown of the 25,000,000 free cash flow and free cash inflow. Please note the word inflow, which compares to the 7,000,000 outflow last year.
This reflects our improved financial performance in 'eighteen and is a little better than we projected. Being free cash flow positive is a key step on our road to recovery. The cash flow associated with our owners' contracts was 52,000,000, some 17,000,000 lower than the prior year. And we expect this number to drop to $40,000,000 to $45,000,000 in 20.19 and then to be in the range of $10,000,000 to $15,000,000 in 20.20. Marking the end of this historical drag and margins and cash.
At that point, the remaining OCP balance of some 15 to 20,000,000 will be a long way from the $447,000,000 cash outflow we faced at the start of 2015. The working capital outflow in the period was $22,000,000 as compared to $14,000,000 last year. In 2018, as with 2017, we didn't utilize any form of receivables or payables financing. Our build receivable days as Rupert said are 29, and trade payable days are 30. Turning to the bottom half of the cash flow.
The other items that contributed the $47,000,000 increase in net debt to $188,000,000 are highlighted. We completed the acquisition of BTP in the U S, and the Caribbean Health FN contracts, leading to a net acquisition outflow of 31,000,000. There was also a Forex movement of 22,000,000, reflecting the impact of the weakening of sterling on our US private placement debt. Daily average net debt for the period was 235,000,000, 47,000,000 higher than year end, which is a similar difference to 2017. Post the covenant adjustments highlighted in the appendix, our net debt to EBITDA leverage is 1.1 times down from one point four times at the end of 2017 and near the bottom of our target range of 1 to 2 times as well as being significantly below a covenant of 3.5 times.
On an underlying basis, leverage was 1.2 times. In December 18, we completed the $250,000,000 refinancing of our revolving credit facility. This facility is committed for 5 years and is provided by a group of 9 banks on substantially the same terms as our previous facility. We reduced the facility size from 480,000,000, reflecting the fact that we are within sight of the finishing line in terms of our OCPs. Thereby reducing facility costs.
In terms of liability stack, we remain in good shape. We have no off balance sheet debt in the form of receivable or payable financing. Our pension is an accounting surplus, a small actuarial deficit, and almost half the liability now sitting with an insurance company. Our payables days are in line with government supplier requirements, We have very little cash received in advance in which revenue has been deferred, and our JVs are operational in nature with minimal debt. As usual, we try and pick a couple of topics of interest to cover in this presentation.
Whether IFRS 16 and inflation can strictly be viewed as interesting, I will leave it up to you. However, on we go, IFRS 16, the new accounting standard for leases, is effective from 1 January 2019. Our 'nineteen guidance is therefore restated for IFRS 16, but it shouldn't be noted that the reported result prospective approach, which sets the liability on 1 January 19, with the right of use asset being calculated as if it's always been in place, and it's worth noting we haven't cherry picked. We've used a 100% of our leases under this method. From a balance sheet perspective, operating leases come on balance sheet as a right of use asset based on the present value of lease payments, with a corresponding liability to the lessor included in the balance sheet is at least obligation.
Lease payments are a portion between finance charges and the reduction in the lease obligation. A key consideration of 16 is its impact in bank covenants because operating lease obligations, which for us will fluctuate significantly will now be considered as debt for accounting purposes. To remove this potential volatility, our bank covenants will remain on a pre 16 basis, and our net debt guidance for next year also excludes IFRS 16. In thinking about 'sixteen, remember that the total reported earnings and associated cash flows are unchanged over the lease term. However, there is a timing impact on earnings, and that asset depreciation is straight lined over the lease term, but the interest cost declines through the life of the lease because it's calculated on a reducing balance basis.
Compared to the previous accounting methodology for operating leases, where the whole operating lease was treated as an operating expense, operating costs will be lower, which leads to higher trading profit, though there is also the interest element, meaning the interest costs will also be higher. In to UTP. Instead, we will have a depreciation charge on the right of use asset of circa 30,000,000 and an associated interest cost of around 5,000,000. Therefore, in terms of adjusting our 'nineteen guidance for IFRS 16, UTP should be increased by around 5,000,000 with a similar 5,000,000 increase in interest cost, meaning no change to earnings per share. Balance sheet wise, the opening adjustment will bring an opening right of use lease asset of some 90,000,000 and a lease liability of $120,000,000 onto the balance sheet.
The difference of $30,000,000 caused partly by the transition methodology and the need to write off the right of use assets and OCP contracts will be taken through retained earnings. Finally, it should be noted that 16 will mean that the new ASC contract leases will come on balance sheet later this year. With the Compass leases being excluded as they had less than a year to run. Around threefour of our revenue is from fixed price contracts. We therefore play close attention to how we protect ourselves against cost inflation, most particularly wage inflation.
As some 70% of our costs are people related. The other quarter of our contracts are a mixture of cost plus, and short term task where part of our revenue is generated directly from end users. For example, Northlink Ferris or Edinburgh bikes, which have more direct mechanisms for passing on cost inflation via fare increases. Going back to the fixed price contracts, Over ninety percent of them have a significant amount of inflationary protection built in. Most commonly, This is in the form of generic inflationary adjusters such as RPI, RPIX, CPI, or baskets of goods indices.
In some instances, we have specific inflation adjusters for labor rates. For example, the London Living wage for our parts contract. Where fuel is provided as part of a contract, we typically have specific fuel price adjusters. The only perfect pressure is essentially a cost plus contract. However, Circa has some significant protection against cost inflation, even though our contracts can be described as fixed in nature.
Finally, let's look at the outlook and modeling assumptions We expect revenue to be in the range of $2,930,000,000, with broadly neutral forex based on where rates have been recently. This is against $2,800,000,000 in 2018 and would be our 1st year of revenue growth since 2014. This assumes organic growth of 3% to 4% and an acquisition contribution of circa 1%, driven by the full year impact of the Corrillion health contracts. For UTP, we previously guided to 95000000 to 100000000 pre IFRS 16. Given the encouraging start to the year, we expect to be around the top end of that range and then a further 5,000,000 increase in relation to to IFRS 16, taking guidance to around 105.
The recent contract wins in the UK and Australia are unlikely to have much impact in profit in 'nineteen due to transition costs, but will contribute fully in 2020. In thinking about 'nineteen, one needs to consider the 10,000,000 to 12,000,000 dragon profits from the margin resets in Milabs and as well as the million of benefit from nonrecurring trading items in 2018. We anticipate that this will be more than set by growth in a number of our business units, notably UK health and as taxes and services, as well as contract cost efficiencies However, we always sensitivity of profit to even small percentage changes in revenues and costs. We expect net finance costs to be around 1,000,000, with the increase on the $14,000,000 of $17,000,000 being primarily due to the absence of non cash credits on the Intelli Net loan note, and the previously discussed IFRS 16 related increase in interest costs of around $5,000,000. We expect net debt excluding the IFRS 16 impact, I.
E. Covenant net debt to be around 200,000,000 with covenant leverage between 1 and 1a half times. The rest of the guidance is there for your reference, and I'll hand you back to Rupert.
Thank you, Angus. So those of you who've been watching our presentations in the past may look 4 hints and, about our, morale, you'll notice that in our highlights and lowlights, stage, which are normally 50% of the acreage for each. The highlights have invaded, the space of the, lowlights, which is rare. But we've had a pretty successful year operation. There have been some operational challenges The sleeper, delivery of sleepers is late.
They come into service in the, in the coming weeks. We will get them going on both the lowland line and the highland line, in time for the summer season this year. There has been the other worrying thing as a sharp rise in prison violence. You'll see this both in the public and the private, prisons. They've had a very, very time, the levels of violence have been very serious in the first half.
They have actually, been showing some signs of reduction, and the some of the initiatives taken by, Rory Stewart, on crime reduction seem to be having a bit of an effect, and we've just had 2 or 3 months, now of significantly or noticeably lower, violence in the prisons. I'm going to talk about the pipeline, more in the coming slides. We lost DeFarma, which was, a blow in the UK. We've been pretty hopeful that we might win that. And we also lost 2 very large contracts in, the US SPA's, which was for looking after, deep space radar systems and a, kitting contract for the US Navy.
We also right at the end of the year lost Bahrain air traffic control, which was actually, quite a valuable contract in terms of margin. The UK environment remains weak. I'm gonna, again, I'll talk more about that little slide on that coming up, and also about Brexit, which is causing you know, immense difficulty for the civil service. I mean, having they already had a lot on in terms of the departments that were suffering significant cuts as a result of government trying to bear down what these keeps stable government expenditure whilst increasing it on the NHS. So the departments like the DOJ and the home office, having to bear a significant cuts.
And then on top of that, we're having to deal with, Brexit. In terms of highlights, Angus has gone through the trading. I went, reiterate that, but it was a year in which we had an upgrade, which is, always nice the, 100% book to bill is important to us whether we maintain that, gate forward who knows, but something we got off to a strong start in 20, 19. OCPs ahead of plan, that means we're actually getting through them for lower costs than we, thought. And clearly, it's been really, really pleasing to have won the, Compass Drake, asylum seeker contract, which is very significant, both for the UK business and for the group as a whole.
And not only have we won it, on price, you know, on on significantly better pricing, but we've also won higher market share. We've lost Scotland and Northern Ireland, but we've won the much larger midlands, regions. So we will be looking after about 45% of all these asylum seekers, in the, UK and my tribute to our contract teams for having done that. And there's another large OCP contract that is up for rebid this year, which is a prisoner escorting, a contract in terms of acquisitions, I think that in a classical turnaround, we got into the acquisition, a theme really quite early. And with both BTP in the US, which is a small niche provider of, repair services 4 radars and, UHF radios for the, for the for the navy.
That's going well. It's well embedded in the and actually the Caribbean Health Care contracts, which come in quite different shapes. So there's some very profitable and there's some not so profitable, but the integration of those that are fully integrated into our business, and we're pleased with what we see, so far. We've had a lot of engagement with the, UK government over the last year since the collapse of, a caribbean, and we're really pleased with the way that gone. I think Corinne.
Corinne was a turning point in terms that it said it changed. We've been telling the government. There was a real problem in that supply chain, but, for a long time, they just kind of thought that was supplier whinging. Suppliers wind the government the whole time your administer. It's one of the things you have to get inoculated as an early stage is supplier whining.
But at the collapse of Korean may government com, concentrate. They engage closely with industry. We engage with them very closely. In a joint working party. And the result has been a playbook that was published, yesterday, which really does think have the possibility that it will, transform greatly for the best of the relationship between, the UK government and its supply chain.
In terms of other operational excellence things, we, our employee engagement remains, good and stable, we've done, with it's still very highly focused on our trading programs at Oxford. We've now done nearly 300 of our managers have gone through the circle Oxford, program. We've delivered our transformation savings and particularly in terms of final IT, an HR. So on an operational level, I think the business has performed, better. There are a couple areas I just want to focus on.
The first is order book and pipeline, a progress. The there's a number of things going on here. The the the the headline is is that our order book is now 12,000,000,000. But within that, we've, gone and restated it for IFRS 15, which has had a couple of effects. One is is that we've had to take out extensions that that we have previously included in the order book, but on the other hand, IFRS 15 mandates that we should include inflation adjustments and also the way that we treat ben a benchmarking.
And the net effect of that has been to increase our reported order book under IFRS 15 by about half a £1,000,000,000. We've also had 700,000,000 coming in, from the Caribbean acquisition. And as you know, we had a positive book to bill in terms of our order intake. So, our our our order book is now in, good, good, good shape. As you know, our pipeline data is incredibly tight.
It's a new business. It's a new business worth over 10, £1,000,000 a year and represents actually about half only about half of our order intake ever comes from the, pipeline. That will clearly drop in, grew to 5 point 3,000,000,000 at the end of, December, thus is now gonna drop as a consequence, of getting the AAC and the NGH contracts by about 1,700,000,000 to about 3a half, and we then got to rebuild it from that. But we've got a strong pipeline of, rebids to go and, and deal with over the coming year. So we, feel reasonably, confident about our order intake in 2019.
In terms of OCPs, Angus has talked about it and, you know, all praise to, Angus for getting the number right. I mean, it's within 6% of the number we originally thought of and many of you who knew when we first declared this enormous number. Back in 20, 14, that we were either they were either far too small or far too big. They're working through were 80% of the way through and were about, I think 4% 6% to the good so far. But the point of this slide is to indicate it's not just doing one thing that has made them better.
There's been operational things, but we've disposed of some We've got to move some contracts that we've, sold to, other, parties. We've managed our way out of contracts successfully, we have turned them into, profitable contracts. The best example of that would be AAC. Was losing us £15,000,000 a year, hopefully turned into, a profitable, contract, but it is nearing. This is a journey that is nearing its end.
Okay. Now in our, market backdrop, piece, we say in our statement, that, we've done we've had another look at market growth. And when we first look back at 20, it 2014, 2015, when we did our strategy review, we took as our benchmark. The weighted average growth of our markets for our mix of business then which was around about 5 to 7 percent between 10 20102014. Now it's clear that things have changed since then, you may notice in our statement that, our favorite strategist, Mike Tyson, as he wisely said, everybody's got a plan to lose until you punch them in the mouth.
And the longer a strategy goes on, the more blows that you have to take and Brexit has been, quite a low blow for the UK market. So we won't run took another look at it, and the short answer is is that whereas the UK was broadly speaking, growing at the same rate as other markets, between 2010 2014. It's now slowed up. It's probably growing at about 0 to 2%. And we think that the average mix is 2 to 3%.
However, that says that some parts of our markets are actually growing very healthily. The naval US navy business, is growing, pretty strongly. Mark will talk about the Australian business is growing pretty strongly. It is really the UK that's not. And within the UK, we think that we're doing better with market, if only just on AAC, which is doubling the size of our, business.
So we're in a situation where we again having just said that we would perform in line with the market, we think we're going to perform better than it. And the 4 forces are still alive and kicking in very strong, growing health care, costs, rising expectations, the quality of service, the need to pub, balance public, expenditure, and voters who are willing to go and pay more taxes. And the, the thing the governments need to do, which is the fierce pressure to deliver more and better, for less still remain very strong in our markets around the world. And at that point, I'd like to introduce to you, Mark Erwin, who runs our business in, Aspect he joined, Sarco in 2013 having worked for GE in the US and also for a Chinese state owned enterprise in the China, working for, Blackstone. I appointed him to run Asback in 2014 when I arrive.
And all I can say is that when the saga of Sarko's turnaround gets inscribed in the book, that Mark will have a leading role in it. He has been the chief elephant holder, having managed to wrangle both grafton, which was then the time our largest ever order, and now NGHS into, the pen he has handled masterfully the exiting from our largest ACP contract, which was ACPB, the offshore patrol, versus where we've ended up spending much less than we might have done. Had it it might not been able to get the customer to agree to recomplete the contract before its natural end. And he and I spent many a dark night trying to sort out the mess that was mounting, prison. So, Mark, over to you.
Rupert, thank you for that kind introduction. And ladies and gentlemen, good morning. It's my privilege to give you just a very brief, update on the Asia Pacific business as part of the overall group. Update on results today. By way of introduction, our Aspect business currently, works across Australia, New Zealand, and Hong Kong where we serve 22 customers through 32 operational contracts.
My team at the beginning of this year is about 8600 strong, and we expect to end the, closer to about 10,000 because of our contract growth. I'll reflect on FY18, but in a bit more detail in a moment. But you can see on this slide, that we generated around £548,000,000 of revenue last year, the equivalent of 980,000,000 Australian dollars at a margin of 4.9%. And we're active across all of Circular strategic sectors although Australia as a geography and justice and immigration as a sector, formed the largest part of our current portfolio. Over recent years, the progress in our business has followed the plan that was communicated by Rupert in 2015.
Where the initial focus was purely on stabilizing the business. We then moved to a transformation phase where our focus was on improving operational delivery and also improving the competitiveness of our business, ahead of us moving to a growth phase. And our results in FY18 show that that is exactly how it's manifested, in the outcomes for the business. While our revenues for the year were broadly flat on an Australian dollar basis, as Angus indicated, we had a significant decline in the first half of the year, through the attrition of 2 key contracts and then more, offset that, by quite, a market turnaround in the second half of the year. That turnaround was driven by, growth in, the organic part of our immigration services contract, through the extension of a number of our existing contracts and, importantly, in commencing new business with new customers in our citizen services business.
That business grew by more than 30%, in the year, on the back of a contract that we started with the Department of Human Services in November 2017, but a contract which more than doubled in terms of its volume, in a 6 month period. And then building on that success, we were able to take on additional service lines for the department, which included the management of a significant correspondence backlog for them. And we showed fairly quickly that, through independent verification, we've delivered real productivity, to the department a significant increase in the quality of response to citizens as they made welfare based inquiries. And with regard to the correspondence work, we cleared 12 months of backlog in just the last 3 months of, 2018. Like the DHS contract our new business with the National Disability Insurance Agency and the Victoria Police all 1st generation outsourcing, but opportunities that were actually shaped by our citizen services team and where we worked very closely with the agencies to actually target an area of difficulty for them and then work with them collaboratively on finding an appropriate operational solution.
For the NDIA, this is one of the most ambitious government programs that's been launched by the Australian government in the past decade. The scheme has, this year an $11,000,000,000 funding envelope. To provide better services to people with disability in the country, but the rollout of the program has not been great. We were called in last year to see how we could help, particularly on the provision of information services and inquiry lines to the MDIA. And as you can see, that one go through all of that, but you can see, the comments from minister Fletcher which clearly indicates that amongst many other benefits, we helped, for example, to reduce call waiting times from 4 minutes 26 seconds to just 28 seconds, for people calling in looking for help.
So this focus on better agency and citizen outcomes allowed us in 2018 to secure a 100% win rate, in pursuing new business in citizen services. More broadly across our portfolio in the division, strong operational delivery, progress on our information savings, as you heard from Angus before, and profitability business, allowed us to increase our profit at the divisional level, 27 percent on a constant currency basis to £26,800,000 and improve our margin to 4.9%. We also reduced our onerous contracts, from 5 to just one remaining contract at the end of last year. We expect to revert that contract before the end of this first quarter with the result most likely in Q3, 2019. And so we expect to end 2019.
In fact, with no onerous contracts in the Aspect portfolio. In terms of our contract awards I referenced DHS and NDA previously. The other win we had in citizen services was to build a new platform to manage non emergency calls for the Victoria Police as well as providing them with, a platform, to move from voice to digital in terms of non emergency citizen inquiries, this contract will become operational, in 1 month's time. We've now completed the build phase, and are just going through user acceptance testing. We also won our first deal in Hong Kong in 3 years.
To, manage, operate, and maintain, trim tunnels as part of a major road infrastructure network that is being built, on the island. And that contract also becomes operational, in the middle of this year. And then finally, as you heard from Rupert, we have got off to a pretty good start already in 2019. On 4th February, we signed a contract to provide a human resource managed service to the Australian Defense Force as a subcontractor to Booper. This contract is valued at around £560,000,000 for the initial 6 years of the contract, but the contract also has an allowable 4 1 year extensions, possibly giving us a 10 year tenure, for that.
We're well advanced in the transition of this contract where we are hiring in excess of 1000, health and allied care workers, doctors, dentists, psychologists, and other care workers to provide an integrated health service across more than 50 defense forces, domestically in Australia, as well as the butterworth base in Malaysia, to over 80,000 ADF members. So we're very proud of this work and particularly, happy with the partnership. That we've been able to And as you heard from Angus, we will see revenue impact in the second half, but we'll see the full year profit impact in 2020. So we exited 2018 with a 33 percent win rate, although I would point out that we still have approximately half a £1,000,000,000 of, growth projects that we submitted in 2018, for which we expect the outcomes to be determined in the first half of twenty nineteen. So we're hopeful that, that conversion rate will further improve as we get those results.
In addition to effectively transitioning this year, we're, obviously, now focused on rebuilding our pipeline as well. Now, the pipeline currently stands at about a £1,000,000,000. The portfolio, as you can see in the funnel is very well balanced across our sectors and also between the core long cycle businesses that we have and the short cycle business opportunities that we've got in both citizen services and in Hong Kong, where we tend to have much more rapid turnaround 2 to 3 year contract opportunities. The other potential area of volume sensitivity in the aspect business is the immigration services contract. In recent years, we've been successful to deliver organic growth in that contract through additional service line requests, and keep the revenue flat despite a decline in the number of detainees.
But as you would be aware from recent media, this is a fairly dynamic policy area And so, we continue to work closely with the Department of Homeland Affairs and the Australian border force, to be able to effectively respond to their needs and ensure that we've got an ongoing role, in serving, the department. And so finally, we absolutely enter 2019, with good momentum. We're continuing to pursue efficiencies while making careful and appropriate investments, in technology enablement of the business as well as investments in developing our people. We launched our people strategy in 2018, and we've got a very clear plan. On how we deliver against our goals for talent acquisition for retention and for the development of our people with a very strong emphasis on diversion I'm sorry, on, with very some emphasis on diversity and inclusion, and always ensuring that as we grow our employee base, that that is done with an uncompromising commitment, to our corporate values.
Our transformation work streams for IT Finance in HR are now largely complete. But as Angus said, our labor costs represent somewhere between 60 70% of our in contract cost. And so our major project this year is to implement a new workforce management platform, and that will begin with the NJHS contract in the second quarter of 2019. We've got quite a bit happening on the transition front as well. We're, not only for the new contracts that we've recently won, but the Clarence Correctional Facility at Grafton, as well as our major project for the research vessel Noyena.
Australia's new ice breaker both of those 2 key platform projects will become operational in mid-twenty 20. And so we are in the final phases of build up. In anticipation of that. We also have a number of key extensions and rebids that we have to successfully execute this year, including our immigration services contract. So the first term of that contract expires in December this year but there is provision in the contractual framework for 2 2 year extensions.
And again, we're working closely with the department, to effect that. So we've got a very positive view, on how we can diversify our contract portfolio, by pursuing profitable business in our core sectors by pursuing opportunities in adjacencies to those core sectors and also by looking at how we can expand our footprint in Southeast Asia. Where there is significant infrastructure and service deficits, that governments need to address, which we see as presenting us with, quite strong midterm opportunities. So we have a well positioned business, in a highly attractive market, and we are really confident about building on the success of 2018 over the next 12 to 24 months. Thank you.
Thank you, Mark. So I'm just gonna skip through the, summary and just leave you through a couple of faults before we get into, our our Q and A. So as I said at the beginning, we've had strong trading in 2018. We've got a strong outlook based on strong order intake going forward. I think that we've got a unstressed balance sheet, without any, Google is, within it.
And I think that we're gonna have more off opportunities for acquisitions if we can find them, which could be, of interest. So, as would be fit a company, led by Angus and myself. We are Eorish, were cheerful in a miserable sort of way. And now to questions.
Morning. It's Roy Mackenzie from UBS. Firstly Angus, after that good cash for surprise in 2018, Can you walk us through the cash flow drags to expect in 'nineteen? And in particular, which of those are non recurring? And then secondly, Rupert, at first, I worried about the outsourcing playbook as it sounds like the government was moving into equity research and publishing some documents.
But after I calm down, it did actually look quite positive for the sector. Can you talk about how it might operationally change the market, you know, bid costs, how will the new pilots potentially work? Do you think it will drive out some suppliers from the market? And also, is there anything you wish had or had not been included in that kind of charter?
Well, let me start with the cash flow. I think this year, we generated $25,000,000 of free cash flow. We anticipate somewhere in the same region next year. Why is it not going up, with the improved profit? Because tax, where we've had the OCP shield, you know, we're going from 10,000,011,000,000 a year to sort of 25 ish 1,000,000 a year, which will be a more representative number as as as we go forward as the effective rate and the cash tax rate come come together.
And with a little bit of working capital outflow with the increase in revenue as we go through the, the second half. And we're committed to spending 10,000,000 on the SPV in Australia as part of the graft and bid a few years ago. We talked about that. We'll be paying for that this year. So, you know, we would expect net debt on a pre IFRS 16 basis to be around 200,000,000 next year you take the 10,000,000 of that out and you get to broadly breakeven, exceptional being about 20.
If I talk a little bit about the playbook, forgive me it was only published, yesterday, although of course, we've been working with the government, to develop it. So we had an idea of what's in it, and we're obviously delighted to see that a substantial part of our 4 principles are within the playbook. Actually, we couldn't ask for better than the playbook. And particularly since it comes with a pretty comprehensive set of guidance notes. It also is talking to Mark about it.
One of the things that he does is that this example of how you can really screw up a market and what happened, the damage that causes if you your suppliers get into real distress. We will be taking this playbook in the UK experience rounds to other jurisdictions to say, actually, this is a better way of doing things. I think the key issue is is is the proof is in the pudding. I mean, the the there was a, a guidance note issued way in 2016 saying we shall not go and impose owner's contract conditions, on suppliers that was completely ignored. I think the difference for this one is that this has real political backing David Ludington himself has committed an awful lot of time and effort to thinking this one this through, and also John Manzoni, the head of the civil service, is very invested in it.
I have the permission to refer to them, to 2 very stubborn ladies who have been behind this, process in the cabinet office. And, they said I can call them because that's what they are. They're very determined, very smart, and the there's no funding for them to stay in the cabinet office working this project through for the next 18 because it will be critical hand, well, to the extent to which departments just ignore it. And I don't think I think the aim is good. For that.
I think that it will, however, take time. And there is a progression that we've seen. So if you go take the AAC contracts, those have some attempts to be more reasoned in the allocation of risk, but not much. The new Pexcon tracks are being negotiated in a much more, a balanced way between the parties, and I think that this is part of a, a process. So it will take time.
This is an old of it will take. There are procurements in train that do not reflect, the so they are government's customer, we are supply. There is gonna be an element of spikiness on it, but I think that it promises to take out turning it from being a really dangerous environment to being one where actually companies can play. Paul.
Mike Flynn's coming.
Thank you. Yeah, it's Paul Sullivan from Barclays. Just firstly, what's in the turning to 2020, what's in the 5% organic guidance, from a rebid and attrition perspective. And then in terms of progress towards 5% margins, what are the moving parts and what what should we be looking for going into 2020? And then I've got one on Australia immigration.
So in terms of the the moving parts, you know, if you look at the rebids we gotta do in 'nineteen, it's 440,000,000. The key one being as Mark talked about the, immigration contract out in Australia. As we go into 'nineteen, we had 5,300,000 in the 5,300,000,000 in the bid pipeline. That's now 3.6 with the contracts we've won come out So, you know, if you look at our new bid win rates, last year, 23% rebid extension win rate 93%. So that is one, dynamic.
In terms of what's driving that 3% to 4% organic growth, we're gonna have a half of AA of National Garrison out in Australia. We'll have a quarter of ASC. So as we go into 20, that will annual annualize. We've also got the icebreaker contract, which, you know, that will be launched and operational. And we'll also have half a year of Grafstein.
So we've got quite a lot of contracts where we know the revenue is going to start. Terms of margin, 100 basis points this year, you know, I think we'll move towards 3.5 as we go through 2019. And then hopefully we'll kick on up. We will not get to 5% in 2020, but hopefully we'll begin to, move up the hockey stick in terms of that.
And then just on Australian immigration, following the ruling last week, how significant is that and and what are the range of outcomes for for the contract, if we were to see offshore immigration move onshore?
So as you're affected, this is a relatively new change in the legislation, and I think, governments and all of the associated agencies still working through what that can potentially mean. What we do know currently is that, the Christmas Island immigration detention facilities will be reopened. The prime minister made that statement last week, and we have begun to mobilize, to bring that into effect. At this stage, it is only to, get the facilities operational again and to put in place the provision of basic services what we are yet to learn from the department is what that means in terms of potential occupancy, a broader range of services or for how long this will continue. So it's it's live, and and we're working through it.
At this point, our focus is really how do we, demonstrate our agility in responding to the requirements of the department and make sure that as we recommission these facilities, we establish safe and secure, facilities and and that we're taking care of the people that we are responsible for.
And in terms of agility, do you just wanna say how quickly many people you mobilized? Yeah.
So Christmas Island, is already within the scope of the contract that we have. The government put the facility into contingency in October last year. And under the contractual arrangement, we are given 72 hours notice to mobilize, in this case, the place we're mobilizing happens to be 1400 kilometers offshore, but we still have 72 hours, and we've been able to do that. We had the first staff on Ireland on Friday morning.
Ed.
Ed Steele from Citi. Just a question about exceptional charges, please. What's the flow through in 2019 from the exceptional costs incurred in 2018, please? And then, moving on to the 2019, 20,000,000 exceptional charge, what does that mainly relate and what do you expect the payback to be? And then sort of 3rd part of the 3 part question, is that it then for separate charges after 2019, please?
Yes.
But, you know, in circle, you never know, but I we are now coming towards the end of the transformation program. So during, 2019, we've got a procurement. We're still working through the transformation in that. We're quite early in that. And that'll begin to kick in as the year goes on.
We still have some work in IT, and we've got some work in HR. But by the end of 19, We're really out of transformation mode, and we're into continuous improvement mode, which is business as usual, and the costs associated with that will not come through the exceptional line. So for example, workforce management, as Mark said, in Australia, 60, 70% of people are, of our costs or people costs in putting workforce management is key. We see that as just a normal normal course part, part part of the business. In terms of the cash costs, we'd expect that to be about $20,000,000.
It's always harder to predict cash costs and exceptionals given timing when in terms of how programs work, but I would have 20 as a cost and about 20 as the, the exceptional cash out for.
Thanks. So just going back to the original part of the question, So what's the flow through in 2019 in terms of P and L gain from the 2018 expenses, please? And then in turn, what do you expect the payback to be from that $20,000,000 in 2019?
Well, the payback is now we're gonna see more of that in the contract. So I I would expect that in terms of contractual benefit, we'll get 10,000,000 dollars, $12,000,000 of cost benefit in 'nineteen, and that will come from different from a variety of different sources, including procurement, which flows through the contract base. So, you've been able to track it pound for pound through overhead G and A shared service up to now. Now it comes into contract. And to be quite honest, the ability to track that to the pound is there's so many moving parts they can't.
So I would expect 10,000,000 plus. And then, you know, the pay our payback's been pretty is has been actually pretty good in terms of exceptional since since we started. So we would expect the further benefits to come through during 20212021, from what we're going to spend in 'nineteen. So you will see some cost benefit, but increasingly, you know, our hope is that the focus changes to revenue and then getting some leverage on that as we go forward.
Can I understand something that that Ed and of danger getting kicked by, Angus here? In terms of the benefit of that profit progression from 18 to 19, remember that the 93 of 18 has £10,000,000 worth of non recurring stuff. So in terms of if you're trying to get the benefit of getting from the exceptional moving through. Actually, on a like for like basis, it's going from 83 to, to, Yeah.
I've I've got that.
And we've also got 10 to 12, remember, on Milab's AWE, these contract renegotiate you've
been very clear about all those moving parts. So my question is based clearly about the exceptions. So just to be totally clear, the $10,000,000 to $12,000,000 gain in 2019 refers to the flow through from 2018 effort and the incremental effort in 2019. Yeah.
And then we'll get more flow through in 20 from 2019.
Morning. It's Kim Martin from Jefferies. I had a similar question, but, regarding fiscal 2020. So, I suppose, as an analyst with a spreadsheet, we can start adding up a number of positives that potentially impact profitability in fiscal 2020. So this is your opportunity, Angus, to try and flag the headwinds to us.
Eeyore is very happy with that question. You know, in in 20, so you're gonna have a number of moving parts as you go from 'nineteen to 'twenty, we've estimated the IFRS 16 impact and underlying trading profit of $5,000,000 in 20.19, let's say, rounded that carries forward, into 20. We're also gonna have an ASC in terms of 16s not in the balance sheet, could be anything from 200 to 400,000,000 that's gonna, come on in terms of assets. So, you know, we'll know by the end of the year, but somewhere around maybe another 5,000,000 for, AAC. And then I know you managed to, put in an incredible number of wins, into your numbers, early doors, but, you know, we'll have the full the full, the annualization.
So 6 months of NGHS where revenue is about 90, just over £90,000,000, and you'll have 9 months of annualization on the ASC. So And then you add on Grafstein, you get half a year of that. You know, icebreaker is always great fun to talk about. It's 15,000,000. It's it's smaller, but we'll have that kicking in, in 2020 as well.
So that should be crystal clear for you,
quite the answer I was expecting. So, we know all the positives they can add up to quite a reasonable number for 'twenty, so that's your chance to flag some negative hang
that that I'm coming on to that. If you could give me, give me a moment. You know, as as ever, you've got, challenge around rebids because we've got $400,000,000. This year, we've got $300,000,000 in, 20. We've got $400,000,000 in 20 And when you you win the extensions, you you will get your margin squeeze a little bit.
Our our order pipeline, you know, one of our big focuses this year will be on rebuilding the pipeline. You know, the pipeline's taken a real hit from NJHS and, ASC in the most positive way but we need to get that pipeline moving back up again. What's in the pipeline looks smaller on average, than it has done previously. So we're gonna have to, you know, there might have to be a bit more BD investment just given the number of opportunities that are small to medium size rather than, very large. And, you know, we, you know, this, you know, this is a business where we've got to be cautious in terms of
the outlook.
So, you know, nobody should get carried away for 2020. You know, we we have you know, the the cash flow being positive is great, but this is a long term journey that we're on. The good thing is it feels like we're now leaving the station.
Yeah. But it
is a steam train and not a, the Shanghai type rapid express.
I have two quick questions on Australia as well, if I may. So first of all, is the capacity of Christmas Island similar to the previous site? Has anything changed? No. In
fact, there are 3 different facilities on the island. Most recently, only one of those was in operation. The last thing we had all three was in 2013. So no change in the capacity.
Thanks. And then, are you in a position to update on off the gory as well, please?
Yes. So, we're waiting as you may know, the government, postponed the decision on Arthur Ghauri, while they were undertaking a broader inquiry around corruption in the Queensland prison system more generally, that, inquiry was completed and a report published in December. We are now hopeful that sometime in the next, several months, we will have an outcome on Ahthugari. The existing contract expires in at the end of June. And so, we see several drivers here.
Hopefully, that will, prompt the government decision shortly.
Can I just say something while we're on Australian, a prison? One of the things that Mark achieved really well last year. Was to take South Queensland Correctional Center, which was a nail prison and convert it to a female, prison, which is a tricky thing to, do. And apparently, prisoners are writing to, the state commissioner saying we want Circo to stay. Because our contract is, is, up for, for for rebid in in Queensland.
So I think we've got pretty good. He runs a pretty good ship on them.
Carl?
Thank you very much. It's Karl Green from Credit Suisse. I've got 3 questions as well. The first one, just very straightforwardly, on the M and A landscape, Rupert, if you could just give us an update there. Of the infrastructure has been thrown a lifeline.
Does that alter your views about UK opportunities versus international? The question, you rightly point out that obviously there's a lot that goes on beneath the surface on the smaller ticket stuff, the IDIQ work just some sense as to what a smaller ticket growth is baked into the FY1920 budgets for revenues And then the final question really just sort of following on from what you said about AAS C and the potential for, off balance sheets, what basically operating leases coming on balance sheet. Given that could be quite a material impact on your balance sheet, are you thinking more about looking at those contracts on a ROCE basis? Obviously, it doesn't affect your covenants. But, that does that alter you thinking about presenting that as a KPI?
Thank you.
So I'll take the M and A the landscape, first of all, I think what you've seen in this last year is that we're able to operate across a number of markets, in in terms of strategically where we would like to, grow I would say both Australia and, US defense would be areas that are of interest. To us because there are markets that we see that are, are growing. On the other hand, if there is we are distinctly on what you might call rubber watch, in the UK, in case other stuff comes along because frankly that Carillion deal was, has worked very well for for us. And it is very, very important that if companies do get distressed, that the ongoing government contracts are properly performed. So we are watchful to see whether there are any opportunities, around.
So I think we're alert to both, but the in slightly different circumstances. One is where we're looking, to see whether there are any opportunities that arise out of distress and that on the other, we're looking for opportunities to further our strategy.
In terms 15% of our revenue to get. Most of that comes from our defense sector in terms of, past task orders. They come out on a regular basis. It was interesting as we went through last year. First half, as we said, was quiet as the government shutdown kicked on in the second half.
Government shutdown is not the big impact this year. And, you know, that momentum in terms of US defense, particularly in terms of Navy continued So, you know, I think we're pretty, you know, we feel reasonably confident that we'll get, the IDIQ revenue this year. In terms of returns, that's quite interesting because we spent a lot of time looking at returns, and you look now, you know, if you take our, underlying trading profit on, average invested capital where it's about 13.1 percent pretax take a nominal tax rate of state, to 20 odd percent, you're at about 10 point 6 in terms of post tax return, and against a whack of you could argue we could spend a day arguing, but 8 to 8 a half percent. So we're actually in positive territory. What's interesting is there's not much difference in capital productivity.
The working capital, as we see, is we get paid pretty, pretty well. We pay our suppliers pretty well. There's very little CapEx been running at circa, you know, sort of 30,000,000, a lot of that being sort of, vehicles support the environmental services or cyber is hardening in terms of our IT. So, you know, looking at margin isn't a bad way, isn't a bad, proxy actually, but we will we look at both carefully as part of every, contract review when we're doing a new bid.
Sam.
Morning. It's Sam Bland from JPMorgan. Just wanted to we've got 2 questions, please. First one is, obviously, about a 100 basis points of margin improvement. Last year.
Can you just kind of tie that back to the slide you gave a little while ago on the the sort of 3 buckets up to the 5 to 6 percent of midterm finally near 5% to 6% margins. And where do you think most of that 100 basis points came from last year in terms of cost savings, low margin runoffs, and revenue growth? And where might it be, if we look to 1920, will it come from the same kind of area, or is it gonna be a little bit of a transition? And the second question is, I guess geographically, it's the UK, which is slowing down in terms of market growth. I think that's about 40% of your revenue.
Can you just give a feeling on what proportion of your order book the UK is? And so is the forward book of business slightly different for what you're operating at the moment? Thanks.
Yes. So in terms of order book, first of all, you know, if we look at the now we've adjusted, a 1,000,000,000 for the IFRS 15, but if you look at the the like for like number, about $8,000,000,000 is in the UK, about $3,000,000,000 is in Aspac, about just over $500,000,000 is in Middle East, and there's about 1,500,000,000 in the in in the Americas. So you can, you you can see that. And the 8,000,000, 1a half of that in the UK is well, was ASC. So as you now look at the margin, we said we said there'll be 3 main elements to get us from the 2.3%, where the margin was, up towards the 5% to 6%.
The first was 50 to 100 basis points in terms of the OCPs. And so as we work through the OCPs, if we do absolutely nothing, other than wait for them to come off and we lose them all, you get 50 basis points. And, you know, that that we have ticked off. And as you can see from the liability coming down, we've got a chunk of that in 2000 and 18. AAC adds maybe 30 basis points to that.
So we're beginning to move towards what Stuart had as Nirvana of a 100 basis points from OCPs. And if we, you know, Pex is clearly the big one that is still to come that we push us towards the top end. But, you know, I would anticipate now that if you're if you're asking if where are we with the ASC, we're probably at 80 to 85% on that 80 to 85 basis points from that. The second element was 100 to 200 in terms of cost reduction, and that's where most of the, bounce came this year. We got 20,000,000 of cost savings.
You look at G And A. That's what it's down by. Keep it moving parts. But these, that's the net saving. And I think we've done a good good job on that middle piece of it.
The piece that still remains the challenge is the right hand side where what we said was we'd expect in our 50 to 100 basis points in terms of, you know, getting the impact of revenue growth and getting some leverage on that. And that, as I think said to Ed, as from 2020 on, that's what we need to be really focused on as we go forward. So good progress on the first 2 and the third one. You know, we need to keep winning what's more work, Mister Ernie.
I think one of the things if I may just add on that on the, order book is remember that in the US, We have a lot of these framework contracts and the IVIQ, contracts. And therefore, actually, the order book is understated in terms of its forward, always expect it to have to generate more from that in the air than in other parts of the world.
Yes.
It's Michael Crawford from Short And Global Investors. I just ask about the competitive, landscape? And in particular, who you regard as credible competitors in the UK now, and also in US and places like US and Australia, is the competition more rational than it has been in the UK?
In in terms of the UK, it's not who we regard as credible. It's who the government regards as credible. 1. And secondly, is that because bidding is conducted under very strict European rules, they can't, and runs a it's a high bar to to to being not credible, in the UK. And I think one of the things of the playbook, I hate is that the government is going to take more attention to the behavior of people.
One of the things that irks us is that the government has introduced, you know, green amber red for strategic suppliers. There are strategic suppliers in the green who are palpably not going and following the government guidance on from payment. And I think that the government is gonna get quite a lot stricter, on that. But you know, all of our competitors are, of course, naval beasts and, they all fight hard for a business, but I, I think there's a difference between fighting hard and, you know, and and just just taking on risk that you shouldn't be take on, but I I I I sense that people are more wary of that. And the competitive environment has changed a lot.
I mean, when AAC, the Compass contract, was first bid. The government had to go and take an extra room in the Queen and of the conference center to for the pre business conference. And now what you had is you just only had one new company coming in, which was meers coming in, as a competitor on that. So I think they are seeing that the intensity of competition has, reduced. In the US, it's such a liquid market.
Is always competitive, can be quite localized. So in naval defense, for instance, where there is strong on the West Coast, but less strong on the on these case, you tend to get these quite small geographic markets where, of individual players, but, you know, it is so huge, so liquid. It is just like no other business work, but it happens to be growing at the moment because the, Navy has an ambition to grow the, the navy to 355, ships. And I think one of the things that we don't see here is just how really serious the Americans are, at rebuilding the navy to be because they are very, very worried about Chinese threat. They've seen that as being a, threat and they're on a strong navy to do it.
We done? Any more questions? You all very much indeed. It took a long time, but we got there in the end, and we will be available for, yeah, indiscretions and questions afterwards. Of course.
As usual.