Good morning. Good morning, everybody. Welcome to Serco's interim results for the first half of 2022. Let me do some introductions first. At the back is my chairman, John Rishton, which is why I'm wearing a tie, of course. Naturally. On the top table here we have Mark Irwin, who runs our UK and Europe business. Joined Serco in 2013, and very successfully ran our Asia-Pacific business before coming to the UK in 2020. Has since been running our largest business, which is the UK and Europe. Rather like John the Baptist, he came before me. Has been a valued colleague ever since. Tom Watson joined the company in 2018, and is a CEO.
We're not quite sure whether it's elect or designate or in waiting. Whatever, he's taken over from David Dacquino, CEO of our highly successful North American business in September. We've dragged him over here before he actually takes on executive responsibility and feels the full weight of that. Of course, Nigel, who you all know. I stand here in some trepidation, because of course at our last results presentation, I couldn't understand why in the full year results, people were urgently looking at their iPads and iPhones, and there was lots of scurrying going around, and of course I was presenting as Russia invaded Ukraine. For the interims, we're hoping that the Taiwanese are not too nervous of current events.
Anyway, we live in difficult times. This Serco has had a cracking good first half. Much better than we expected at the beginning of the year. This was to be the year when we were going to get the great slowdown after all the test and trace revenues. In fact, the rest of our business has performed amazingly well. We've had, in revenues, ex test and trace, 12% growth in our revenues. On UTP, we lost GBP 25 million of UTP by a combination of test and trace and also AWE ending in last June. We've made that all back and more from the rest of the business.
75% of our UTP now comes from outside the UK, and it's not that we don't love the UK, but it just underlines how very broad our portfolio of countries is and how well that has played. This is the B2G platform with its diversification, its breadth, and its agility. I mean, I remember when we announced that we were exiting AWE, people sort of thought it was the end of the world. We'd never make it up. Well, actually, we have, and we've made it up. It's not just one sector. Our defense business has been very strong in North America. Also our citizen services business and case management business in North America has been strong.
Our immigration business has been strong in Australia and in the U.K. That would be a good idea, but I think we got. Yes, that's. Thank you so much for reminding me, because otherwise we might have missed the disclaimer. That would have been a terrible thing. Thank you for reminding that. I thought I was gonna have to hit you. The cash also has been incredibly strong with the conversion of over 100%. We're now down to 0.5x leverage. We did actually do a small acquisition in the first half called Sapienza, but it's very small, but we got a decent pipeline. The order book up half a billion pounds, which is not entirely shabby.
Strong order intake despite it being a very slow period, time for rebids and extensions. If you'll remember from our Capital Markets Day, if you did the sums, you would have worked out that if we met our targets, we would get 15% dividend growth over the five-year period. You'll see this is 18%, and that's the beneficial effect of the share buyback, reducing the number of shares. We're getting a dividend per share that is growing faster than our actual dividend payouts. In terms of the guidance, we've given it a slight nudge up. It's partly technical, which is FX, and partly because we continue to have strong trading after the last update at the end of May.
The h ere we go. Trying to get the slide presentation up. Maybe it's because I'm pressing the wrong thing. There we go. Can you put that into presentation mode, please? Stand back and look at my favorite slide, which is the long-term growth of the business since 2017. We showed this at the Capital Markets Day, and what's that basically saying is that even if we have UTP that's broadly speaking at the same level as last year in 2022, it will still represent a revenue CAGR of 8% from 2017 and a UTP CAGR of 27%. Return on capital has dropped slightly because of the acquisition of WBB, but still is a very healthy 21%.
If you look at our cash conversion, it says there that it's now consistently over 80%. That was the target that we put out at the Capital Markets Day. In fact, over the last three years, it will have averaged about 110%, and that is cash conversion without any funnies in it. On that happy note, I'm gonna hand over to Nigel who will talk you through the numbers. Remember to advance the slides.
Thank you, Rupert, and good morning to everybody. I'm gonna start with the financial summary of the group's performance and underline what Rupert's just said. It has been a very strong set of results for the first half of the year. Overall, the group's revenue has grown by 1% in the period. We've had higher activity on a number of contracts across our portfolio, and that's partially offset the big negative drag that we've had of 10% from the ramp down of the UK Test and Trace contracts in quarter one. In addition, we've had foreign exchanges added about 2%, and WBB acquisition added a further 2% to revenue. Underlying trading profit was GBP 130 million, which is an increase of 6% on 2021, with a margin of 5.9%.
We expect to see higher margins in the first half of the year because of the timing of the volume work on contracts like CMS, the Obamacare eligibility contract. This combined with the UK COVID work in quarter one, recovery from contracts that have previously been adversely impacted by COVID, and higher volumes than expected on both immigration and CMS, have provided a bump to our profit margin and take it to the top of our medium-term range of 5%-6%. Underlying EPS is 7.7 pence. It's a 14% increase on last year due to the strong trading profit performance combined with slightly lower finance and tax costs and the ongoing benefit of the share buyback program. Free cash flow of GBP 96 million results in a cash conversion of 101%.
The strong cash flow contributes to the group's leverage of 0.5x EBITDA at the half year. This includes the cash outflow for the first GBP 25 million of our GBP 90 million share buyback program. As Mark and Tom are here today, I'll let them take us through the results for the UK and Europe and for the North America divisions. The headline results in UK and Europe are strong. Even though revenue is down 5%, this is after GBP 220 million of lower Test and Trace revenue in the period, which has been largely offset by stronger performance across the rest of the UK business. The Americas revenue and profit are both up significantly in the period from strong base business performance across the portfolio.
The WBB acquisition has added further, as well as some currency help. Tom will provide more color on this when he gets up and speaks in a few minutes. Moving on to Asia Pacific in a little bit more detail, who have delivered an exceptional profit performance in the first half of the year. Organic revenue growth was 3% due to higher volumes in the immigration services contract and in citizen services, where we've benefited from our agility to react at short notice to meet the changing needs of the customer. In our health sector, we have seen lower revenue due to the reduction in scope in Fiona Stanley last year, albeit this has had a relatively small profit impact.
The underlying trading profit margin for the period has increased by 1.2 percentage points to 6.7% due to the increased volumes and mix of services in immigration and good margins on the shorter-term citizen services work. Order intake in the period was relatively light following the unsuccessful bids on Frankston Hospital and the vehicle licensing in Victoria. As those opportunities have dropped out, the pipeline for new business reduced in the period to just over GBP 1 billion. A particular focus for the region currently is the next generation of the immigration services contract, which will be rebid before the current contract comes to an end in December 2023.
The Middle East division's results continue to reflect the impact of the Dubai Metro contract that ended in September 2021, which is a significantly greater impact on revenue than on profit due to its lower than average margins. Despite the lower revenues, profit increased 17%, and the profit margin almost doubled to 9.4%. The successful exit of the Dubai Metro has been accretive to margin, supported by further recovery in activity levels in airport services contracts as international travel continues to improve post-COVID. Going forward, we would expect to see the Middle East will operate at margins higher than what we've seen in recent years.
In terms of order intake, we have successfully rebid the Dubai Airport Navigation Services contract, and we were successful in winning a new contract for facilities management services for the Riyadh International Airport. We've also been pleased with some early progress on some smaller but higher margin wins for asset management consulting services, particularly in the Kingdom of Saudi Arabia. The pipeline in the Middle East continues to be healthy across all sectors, including opportunities for further consulting work, fire and rescue services, and airport services. Turning to cash. Free cash flow continued to be strong in the period, and trading cash conversion was just over 100%, supported by flat working capital. This adjusted net debt of GBP 164 million was reduced by GBP 40 million since the year end.
This is due to the strong free cash flow, offset by GBP 25 million of share buyback and GBP 19 million final dividend in respect to 2021, and the negative foreign exchange impact from converting US-denominated debt into sterling. We've not used any financing facilities or efforts out of the ordinary to reduce the period-end net debt. In fact, our average daily net debt in the first half was only GBP 35 million higher than our period-end net debt. Leverage of 0.5 times EBITDA remains below our 1-2 times medium-term target, which provides significant investment capacity. This takes us on to capital allocation, where the strong balance sheet enables us to fund all four O's of our capital allocation framework as we set out at the Capital Markets Day in December.
Our first priority will always be to invest in the business to generate organic growth, as this typically brings the highest return on invested capital. This has continued in the first half as we've invested in business development to support a healthy pipeline of GBP 8 billion. We've had investments in IT, including the continued rollout of Time to Work and building enhanced capability and tools for asset management. We've also restarted our residential Oxford leadership and contract manager courses, including for the first time we've run a course specifically designed for women in leadership. Second, on dividends, we've announced today our interim dividend for 2022 of 0.94 pence per share, which is an 18% increase on last year and follows the 15% increase that we had last year.
We remain on track to reduce our dividend cover towards three times over the medium term. Our third priority is to fund acquisitions. In July, we completed a small bolt-on acquisition in Europe called Sapienza, which complements our European space business. During the first half, we have continued with our disciplined approach, reviewing a broad range of acquisition targets and opportunities, knowing that we have the balance sheet strength available when the right opportunity comes along at the right price. Our final priority is to return surplus cash to shareholders. We're well progressed the share buyback program announced in February, with GBP 25 million having been completed by the end of June. We plan that the remainder of shares will be purchased during the calendar year.
As we presented at Capital Markets Day, the board will continue to keep the strength of the balance sheet under review. Finally, turning to guidance for 2022. Today we've announced a small uplift to profit guidance compared to the May trading statement. This is partly due to foreign exchange benefit as sterling has weakened further, as well as stronger volumes we've seen across the business in the second quarter. Our view of revenue and profit for the second half are unchanged since the May trading statement, which will be broadly flat to last year in a period when there'll be no test and trace volumes compared to the GBP 260 million of revenue in the second half of last year.
In the second half, we do expect profit and margins to be lower than the first half as the UK Test and Trace has ended. Volumes on the CMS contract are weighted to the first half. Expected immigration volumes will likely reduce and will fund a one-off payment to frontline workers. These reductions will be offset in the second half by the ramp up. Sorry, partially offset in the second half by the ramp up of new contracts, including DWP Restart, the Defence Infrastructure Organisation contract, and recent wins in North America Defense. Both net finance costs and the effective tax rate are expected to be slightly better in the year. Net finance costs benefit from lower borrowings and pension costs, which will more than offset the higher interest rates.
On tax, the release of a tax provision will throw into a lower full-year rate. This is a one-off, and the effective tax rate in future years is still expected to be around 25%. Our free cash flow guidance has improved by £20 million to £140 million as some of the strong first half performance benefits the full year. Net debt reduced accordingly, albeit with some negative foreign exchange impact from the stronger US dollar. Leverage at the end of the year is forecast to be below 1x EBITDA, unless there are significant M&A opportunities in the second half. On that point, I will now hand over to Tom.
Thank you, Nigel, and good morning, everyone. To begin with, I want to tell you how excited and honored I am to be assuming the role as CEO of the division from David Dacquino. David Dacquino has been a fantastic leader and has done an outstanding job leading our division and our business for over five years. I've been working side by side with David Dacquino for four years in my current role as Head of U.S. Defense, and I've been directly involved in many of the key aspects of the division, such as developing the strategy, integrating our acquisitions, and growing the pipeline. These are big shoes to fill, but I'm highly confident we have a successful and orderly transition, and I will look forward to leading the incredible team in continuing us on a path of sustained growth. The American division reported strong revenue.
Let me make sure I got the slide. Here we go. The American division reported strong revenue growth of 18% in the period, driven by the acquisitions of WBB and the strong dollar. Organic revenue was 3%. Our citizen service segment saw the strongest revenue growth in the region, benefiting from higher case management volumes on CMS and post-COVID recovery activities on the Ontario driving examination contract. Defense includes revenues from WBB acquisition, excluding which there was a small organic decline due to reduced volumes on one large but low-margin ship integration contract. Underlying trading profit was GBP 76 million, which increased the profit margin by 140 basis points in the year to 12.2%. The CMS contract continued to be a good driver of margins, benefiting from both higher revenues and further operational efficiencies.
Order intake was very strong with a book to bill of 138%. A particular note is that around 60% of the wins came from new business. Our most significant new business award so far this year was the GBP 280 million Navy ship acquisition program management contract, which is now mobilizing following the successful resolution of a protest. We also received a new and very exciting $60 million award, GBP 60 million, excuse me, award to provide ship design and build services as part of the no manning required ship program, which we call NOMARS. In addition, since the period end, we have been notified that we were successful in the rebid of our U.S. Navy C-21 contract.
The new contract is expected to be worth around GBP 340 million over five years, which will help reduce risk to our 2023.
Tom, thank you, and good morning to everyone. In the absence of our slide being up on the screen, could I please direct your attention to page 20 in our booklet? We're back. Let's see if we can get this working. We'll keep going. For the UK and Europe business, at a headline level, revenues for the division declined 5% compared to the same period in 2021 due to the end of the UK test and trace work. That reduced revenues, as you heard from Nigel, by GBP 220 million or 20% at the level of the division.
Excluding the impact of the COVID support contracts, revenue is, however, up more than GBP 170 million year-on-year, benefiting from the ramp-up of restart and employment services contract for the Department for Work and Pensions, and higher demand in our immigration services business in the UK. Our UK Immigration Services contract for accommodation and support services for asylum seekers is now the largest contract by revenue for the group. Underlying trading profit of GBP 38 million was down GBP 18 million versus the prior year. Positively, immigration services volumes, the commencement of the DWP restart program, and the operationalization of our joint venture, VIVO, helped to reduce what otherwise would have been a GBP 25 million trading profit headwind.
The margin of 3.8% was down 160 basis points, with the end of AWE of note, where the reduction in profit is not associated with the reduction in Serco reported revenue due to the structure of the joint venture. Margins in the period were also impacted by the immigration contract, seeing higher utilities cost during the period. The indexation for this contract takes effect in the second half of 2022, and we've now also hedged utilities through to early 2024. You may recall that Vivo has been awarded three significant contracts by the UK Defence Infrastructure Organisation. Service to the DIO-built estate commenced in February. Service for defense housing went live in April, and service for the U.S. Visiting Forces Support will commence toward the end of the year.
Our UK defense business has historically provided operations and technical services as well as asset management support in the air, space, and maritime domains. Through VIVO, we now have taken a meaningful position in the land domain as well. At maturity, we expect that VIVO will generate revenues in excess of GBP 400 million annually at the joint venture level. We've also made progress in the development of our European business, where we've diversified our defense portfolio from the management of defense bases into the maritime domain through the acquisition of Clemaco in July 2021. Last month marked the first anniversary of our ownership of this business. The business is now fully integrated into our European operations. It is identified as Serco Maritime Services and is providing in-service technical and maintenance support for the Belgian and Dutch minehunter class of ships.
You may recall also from our Capital Markets Day presentation in December, we highlighted the work we do for the European Space Agency and other national agencies in the civil space sector. Through the acquisition of Sapienza, which we closed last month, we welcome 160 new colleagues who support 50 space missions for 30 clients across 5 European countries, and also extends to the UK. More broadly, our order intake in the period was robust at around GBP 1 billion, including the successful bid for HMP Fosse Way, the group's largest contract win in the first half. Leveraging our B2G platform has also seen us more recently, in the second half, announced as the preferred bidder for the Home Office to provide manned freight search capability at three border crossing locations in France.
Our UK justice and immigration team developed and will support the implementation of the technical solution, but the services will ultimately be delivered by Serco France. We see this as an important first step into the immigration and border protection sector for our European business. In terms of other key bids and rebids, in particular, the outcome for FPMS will be known in the fourth quarter of this year, while the Skynet outcome has now been delayed into the first quarter of 2023. Overall, the pipeline for the division remains strong, exceeding GBP 3 billion at the half year. Just before I conclude, I wanted to acknowledge the 24,000 members of my team who continue to show unwavering commitment to our purpose and values.
On our side, we are working hard every day to assure their safety and well-being, to enable an environment that is underpinned by equity and inclusion, and where the success of our business translates into personal development and economic and career opportunities for all of our people. Thank you for your attention, and I'll now hand back to Rupert.
Well done and thank you, Mark. Are we back online again, do we think? Webcast back up?
Yes.
Good. Apologies to those of you on the webcast. We lost power momentarily, but we're back again. Okay. Usual slide, highlights and lowlights. Well, clearly it's been a bit of a cracking first half as we've done. The performance has been strong UTP, cash order book, 12% revenue growth, ex test and trace. Very pleased with all that. I'm also delighted to see that all four elements of our capital allocation model are creating value, investing in the business, increasing dividends, a bit of M&A, and returning excess cash to shareholders.
Within strong new business wins, I can't emphasize too much that the 94% book to bill would have been if we'd had a normal level of rebids and extensions, that would have been way over a 100%. They come and they go in terms of the timing of them. We had strong new business. I particularly want to just point out what the SHAPM and the NOMARS bids. I mean, these are really, really core contracts right at the top of, in the center of the U.S. Navy's business. The SHAPM, we are helping the U.S. Navy with the project management and procurement of their submarines.
On NOMARS, it's also, I think, our first contract that we've had with DARPA, which is the Defense Advanced Research Projects Agency, which is a real plus up for us. There's no way we would have got those contracts without the acquisition of the Alion business now METS, and also with the help of WBB in our portfolio. The second half win of C-21, this was a very large core METS contract that was awarded to a competitor. We protested. It's been a long and bloody fight, but actually we won, and our protest was upheld, and we've now been awarded that contract. That will be a valuable bedrock to our business in the U.S. over the next five years. Pipeline's very healthy.
It does, you know, goes up and now it's up 40% year-on-year, but it's down on the first half. It, because it's so narrowly defined, which is only new business, and because actually we've signed a lot of new business, it's gone down a bit. We've had some bid losses, VicRoads in Australia, Frankston Hospital. We've also withdrawn from the Fleet Solid Support competition, having completed the first two phases of it. All that has served to reduce the pipeline, but at GBP 8.1 billion, frankly, it's still very helpful. Very, very strong. Mark paid tribute to the 24,000 people he's responsible for across the business.
We've had strong operational delivery, despite really difficult conditions in many of our contracts in terms of the labor markets and waves of COVID, and like it's been difficult. I also want to draw attention to the progress we've been making on diversity and inclusion and how important that this is to us. I actually think back to 2017 and see the number there, that there was seventeen, only 17% of our senior management team of 330 people were women. We're now at 33% and rising. I should think we'll be 34, 35% really, quite quickly. So that is getting w e have taken swift action to try and get that more balanced, and it's working really well for our business.
Likewise, disability and people with declared health conditions, the number has doubled within the business. We're now at 5%. And also the gender pay gap has reduced from 13% to 7%, all of which is important. In terms of pay, our pay has increased way faster than we budgeted. But we've also introduced a one-off payment of GBP 9 million going to 30 or 40 thousand people. It's an average of about GBP 200 each, which is not a pay increase. This is above pay increases. This is just to say we recognize everybody's working, A, bloody hard, and B, actually, everybody's gonna face a tough September and October.
We're putting a bit of money into people's pockets, particularly the low paid, as we go into the autumn because, frankly, we can afford it. We think it's the right thing to do. In terms of the lowlights, if you read my meanderings and musings in the annual report, the word concatenation is not often used with black swans, but we sure had it. If you think of the Russian invasion of Ukraine two years ago, almost exactly within two weeks of two years later, I'm sorry. If you think of COVID, almost two years later to the day, not quite to the week, Russia invades Ukraine. These are two black swans nobody foresaw.
What is as shown is the resilience and agility of our business. It continues to be hard to recruit and retain staff, but I sense that's getting a bit easier. I sense that people are seeing that, particularly when their energy bills and inflation starts to hit, more people are coming back into the labor market, and people are a bit less willing to jump jobs. Repeated COVID waves has been a real nightmare, and you'll know this from your workplaces, where people are still catching it and it's been going in waves. That's made difficult.
Inflation, we're well protected from a contractual point of view, but it does make life more complicated, and particularly, dare I say, this sort of inflation where, you know, six months ago, we were at 2%, now we're at 9%, and we're forecasting back at 2% at the end of 2023. I mean, how do people plan their lives and resources? On energy and stuff, when do you fix prices going forward? It brings complexity into the business. UTP is gonna be lower in the second half than the first. It nearly always is, and a lot of that is driven by the CMS contract in the U.S., where we get the open enrollment in the first part of the year.
Clearly, we had a little, some benefit of Test and Trace in the first half in Q1. That's now completely gone. We've got higher labor costs, and we think that we're gonna have lower volumes probably in Australian immigration. Other lowlights, the rapid increase in the number of people we're looking after on the asylum seeker contract in the UK. We're coping, but you know, it is difficult to find people homes. There are still. We weren't responsible for the Afghan program. People going, "I still think there are 7,000 Afghan people still in the hotels." There's large numbers of people. It's hard to find additional accommodation because lots of people are still arriving.
In one of our prisons in Australia, we had a disturbance, a large disturbance or a small riot. But it has caused damage to a part of the infrastructure there, and that has reduced our capacity at what is now the largest prison in Australia, shortly followed by Clarence, which is running. Those were some of the lowlights. Basically, the business performed, we think, really, really well and better than we expected in the first half. Just reflecting a bit on the Capital Markets Day that we gave last December, our management framework, the business to government platform that we have and the advantages that this brings us. One, all these were on show in the first half.
The agility, the ability to go after, business, to switch sectors and to switch countries. I mean, if you'd taken any one of our, businesses and said you were just in a single jurisdiction, it would be a very different, business with a very different risk exposure. The breadth of what we are able to offer, from leisure centers to, defense to, and the front line, work on defense, but also the design and development of advanced ships. The reach that we have in terms of our global footprint, way different from our competitors, driving efficiency that we get from, volume, but also making the business very resilient.
This ability to, of breadth and reach and agility is summed up in the words that you see happening in the first half called follow the money. You know, when the test and trace falls away, we've got other parts of our business trying to help us make money and deliver value for governments and for our shareholders and employees. The key message is, you'll remember from the Capital Markets Day, that our markets are large, diverse, and liquid. Private expertise is going to be valued, and I think in a world in which governments are ever more pressed for cash, the four forces that we talked about are larger than they ever were in terms of government debt.
The government, you know, are going to be keenly interested in using the private sector to deliver value for money, outputs. The fact that we've had a consistent track record of delivery, that we have a strong and differentiated and defensible position that's very hard to imitate. Competitors can't just stand up and go. It's taken us 25 years to build a business with the international footprint that we have. The powerful and scalable business-to-government platform. The fact that we've still got a lot more work to do. This business is far from performing as well as it could. There's more that we can do. That over the last few years, we've developed relationships of being a trusted and a valued partner of governments.
At the CMD, we said that we expected our revenues to grow at 4%-6%, which was of market growing 2%-3%. Now, when inflation comes in at 9%, that obviously goes and changes that calculus a bit. One of the things we've said in our RNS, we don't expect our revenues to grow twice as fast as government revenues. If government is growing at 5% or 6%, because we won't grow at 10%, obviously. We will grow faster than the market. We expect our profits to grow faster, but actually the margins are really at the top end of where we thought they were anyway. I think we just have to take a long-term view.
We're not chasing margins in this business. What we are chasing, though, is cash conversion. As I said, we've achieved over 100% over the last three years. We are showing that our returns to shareholders can grow faster than profits. On that happy note, thank you for your attention. Apologies for the power outage in the middle of the webcast, but we'll now go over to Q&A, and we'll start in the room, and then we'll go over to the webcast. I'm gonna step down, and we will take the first question. Who wants to go first? Mr. Brent. Joe Brent. Joe. There's a microphone coming your way. No, no. Joe in the front here, please.
We'll come to Arthur in a moment.
Thank you. Three questions, if I may. Firstly, on your comment on, I'm not even gonna say it, black swans. You have those as a low light. In COVID, you made money, and arguably, Ukraine has been positive for your defense business. Hard to manage but actually profitable, arguably. Interested in your thoughts on that. Secondly, for the year, I think consensus is pointing to about 8% organic growth. Be very interested in your thoughts as to how much of that is volume and how much is price in the light of what you're saying about inflation. Thirdly, just interested in why you withdrew from Fleet Solid Support.
Right. I'm gonna ask Mark to answer about Fleet Solid Support. In terms of black swans, well, I mean, it depends on the type of black swan, but I mean, they've not been good for the world. They have disrupted. The fact that through our agility, we were able to get on the back of test and trace and, I mean, I don't think it is a general case that black swans are good for our business. Certainly, we've not had a lift from Ukraine from our defense business. If anything, we are getting a lift in the defense business more from the focus of the North American Navy in responding to Chinese aggression in Taiwan. That is driving that.
I don't think that this is a. If you go to my former business at Aggreko, we loved a swan. Not so much in at Serco. Do you want to talk to
No questions.
about volume and price?
Yeah, when we look at our business, we think we've got good inflation protection. About half our contracts have got indexation in them. About another third are on very short-term contracts, cost plus. There's about another 10-15% where we've got other kinds of protection backing us up against supply chains and other activities. To actually really pin down what is the inflation impact of that is quite difficult. It's easy to pick up the indexation. The other bits are much more difficult to measure. The bit I'm much more focused on is, am I seeing my revenue and my costs going out of kilter? As we've gone through the first half, we haven't seen that. We haven't seen a dilution or an improvement in margins because of inflation.
When we look at our forecast in the second half, there is inevitably a little bit of revenue upside from that, from inflation. But we're not seeing a divergence between our costs and our revenues. So I think the piece I take comfort for is that protection that we thought we had in our contracts is actually working and is working when interest rates are as extreme as they are at the moment. Sorry. As when inflation rates are as extreme as they are at the moment.
I think it's fair to say, and correct me if it's not, I know you will. Most of the 8% will be volume because it's volume in CMS and it's volume in immigration.
That's right.
Would be the, uh-
That's absolutely right.
Mark, FSS.
Certainly, Rupert. I think it's important to note that the Fleet Solid Support program had two parts. There was a design phase and then a manufacturing phase. We participated successfully in the design phase through our partnership with Damen, with sound parent design, and using our colleagues in Serco Canada Marine to advance that design. We believe we had a robust technical solution for that. In terms of the manufacturing phase, which is the phase that we have withdrawn from, the government's requirement is that all three ships in the class be assembled in the UK. That would require us relying on infrastructure that we believe is not yet ready to be able to do this, and therefore translates to risk that we could not effectively manage.
The optionality to build part of the fleet offshore is something that we could do, but to go to whole of class effectively from an entry-level position in yards that may not yet be capable was risk that we felt was not appropriate for us or potentially even for the MOD.
So-
We do, though, if I may just.
Yeah.
We do, though, have very strong interest to support the national shipbuilding strategy. We continue to work with our partners and look at what we can do for further programs as that capability develops in the UK.
Right. Chris, you got the mic there.
Morning. Chris Bamberry, Peel Hunt. Could you give us a sense of the breadth and depth of the M&A pipeline just now in the pricing? Secondly, the failed bids, VicRoads and Frankston, have you had any feedback on those yet? Thank you.
Yeah, if I take that. What was the first part of your question?
Just a sense of the breadth and depth of the M&A pipeline and pricing you're seeing.
Oh, you're right. M&A, there's a fair few. There's a pipeline that our M&A team have put together and are actually getting up from behind their desk. There's the odd thing around. As you know, we kiss many frogs and look around. I think maybe there's a hope that in the current environment there may be some companies out there that are nearer our expectations in terms of what we pay. I think we're okay on that. VicRoads was a huge bid for a 40-year franchise to run vehicle licensing for New South Wales. We had a really good run at it.
On these 40-year franchise deals, we were not involved in the financing or the equity raising. We had a part in it. We were a subcontractor to a group called Plenary. Our consortium was comprehensively outbid by Macquarie. We're not entirely unhopeful that, you know, something may come of it sometime. Frankston Hospital again. Frankston Hospital was a PPP, and it wasn't huge. We lost that. We always, you know, if you don't, you're not. If you're not losing stuff, you're not trying. I would say that just as with FSS, we swung the bat a bit. You know, it's one thing building one icebreaker for the Australian government, another building three best-in-class and finding a shipyard.
I think we had a really good design. The interesting thing was how closely our maritime people worked across. We have a very good relationship with the MOD, and they, I think, appreciated us bringing an alternative design. At the end of the day, we are not ourselves shipbuilders, and so we needed to find a partner. All right. Okay. Arthur, do you want the Oscar, you're not called Arthur, I don't think.
Thanks very much. Arthur, three from me if I may. Firstly, you did 1.4 times book to bill in the Americas business, which obviously is higher than average. Are you expecting this to result in a meaningful acceleration in organic growth? And can you give us an idea of roughly how much? Second question. For the group as a whole, you had GBP 2 billion of order intake, which 70% was new business. That comes to sort of GBP 1.4 billion. I just wondered if you could tell us how both the 70% new business figure and the GBP 1.4 billion of new business won compares with normal. Then third one, U.S. defense. Obviously the pipeline's up from GBP 2.2 billion to GBP 3.1 billion in the U.S. business.
Would you say that this arises from sort of robust increases to U.S. defense spending in FY 2022, or is it more a reflection on what might come in FY 2023? Thank you.
I'm gonna ask Tom to answer the third question about defense budgets, but just be warned, Arthur goes to bed at night reading the defense estimates. No. It's his joy and pleasure. I read diesel manuals, he reads defense estimates. I'll take the two, the book-to-bill and the 70%. Look, it is on the whole good news that we have our highest book-to-bill in our division that has the highest margins. You know, and building out scale in the US, we've invested a lot of money in acquiring businesses in the US, so that's good. It evens out. I mean, the Australian book-to-bill was way lower, and that's coming back to this point of having a footprint.
Most of that, though, remember that the thing about these book-to-bills is that to the extent that they are on contracts like C-21 that last for five years, it's actually reflecting long lifetimes on contracts rather than you ought to look at the annual contract value and not just the total contract value. As far as the 70% being new business and less, yes, we did have a slightly above average conversion win rate on the new business, despite the roads and stuff like that. We had a higher than we would normally have. You know, we spent between 20%-30%. I think we're just fractionally above that. It's just timing on the flows of. Because the pipeline that we publish is only new business.
We don't include rebids within that. It's a pretty narrow definition. I think that one will just be in the warp and weft. I'm pleased with it, but I'm not rapturous. Tom, do you want to just talk about what's happened to the U.S. defense estimates?
Yeah.
Now you've had a moment to think about that.
Yeah, absolutely. Your first question, though, is related to the size of our pipeline and is that more reflective of the size of the budget. Reality is, it's more reflective of our investments in the portfolio. If you think about the strategic investments we've made, particularly in the Alion Naval Systems business and in WBB, that together with our existing business, when we put all that together, we do these things called synergy bids, right, where we're taking adjacencies and capabilities from these businesses and as we put them together and integrate them, and that's driving significant growth in our pipeline. We're able to go after bids that we were not able to go after before, and we're having some success in that.
That's the result of, you know, kind of a multi-year strategy coming together. Super excited about that. As far as the defense budget is concerned, I mean, we were surprised by a 22% increase. But as Rupert alluded to, that is very much a result of China aggression and the war in Ukraine. Because we were actually expecting to see more domestic spending increases versus defense spending. We would have expected more in the federal civilian side of the business. As far as 2023 is what we're seeing from a 2023 budgeting perspective, it's hard to say, but, you know, they're guiding towards between 5%-10% growth in defense. Which, you know, in any case, even if it's flat, it's still a very large number.
That would be beneficial to our pipeline to have more opportunities, specifically within the Navy.
Okay. Other?
Thank you.
Thank you.
Thank you.
Oscar.
Yes, it's Oscar from JPMorgan. I have three questions. The first one may be for Nigel. It's going back to wage inflation and indexation. You talked about most of the revenue growth being volume in H1. Can you just explain when indexation tends to kick in in contracts? You know, if there's any benefit in the second half. The second question is on the UK immigration work. It's been quite strong in the first half and also guided in the second half. Can you just explain when you expect that to fall back down to normal levels and what's really driving that growth? The third one, again, is in the UK. You've talked about some wins with that are Brexit related. Are we starting to see some kind of declogging of the UK procurement pipeline? Are there more opportunities in the UK?
Well, I'll ask Mark to take those two, but Nigel, why don't you start on the inflation indexation?
We do end up sometimes with a divergence between, indexation is generally applied on the anniversary date of the contract. We actually have a lot of people and their annual pay rise tends to be at a different date. We can have differences. On some contracts we win, but on some contracts we lose. Our biggest contract in Australia, their indexation was applied at the end of quarter one. Our biggest contract in the UK, which is both immigration contracts, gets their indexation in October. We will see, we've taken a chunk of inflation costs in immigration in the first half, particularly in utilities, but in wages as well, and we'll see the benefit of indexation come late.
On that one, there's a lag before you get the indexation benefit. In Australia, I would say that the salary increases generally tend to be at the start of the year, and we've got that indexation at the start of quarter two. Those are just illustrative of how they can range. I think the message take away is some will win or some will lose as we go into inflation. If you win or lose, you'll get the reverse as you come out of that high inflation period. As we look at the moment, I don't think there may be a little bit more lag from maybe getting the costs slightly ahead of us as getting the indexation.
I don't think it's a particular big number that I'm worried about.
Mark
In terms of the immigration services volume, Oscar, there are, you know, sort of complex demand equation, but the two big drivers, one is arrivals, and the other is the speed at which the Home Office processes and assesses the application. We've seen both of those abnormally high. At the level of arrivals, as you would have read in the press, and then also the Home Office catching up on processing backlog. We are sort of tempering our view on volumes as we go to the end of the year as the Home Office catches up, and then is able to conduct more of these evaluations and process people. I think we'll be roughly where we are now. We have 32,000 service users in the U.K.
We'll see that potentially softening just a little bit as we go to the end of the year as the processing catches up.
Mark, on Brexit, is the Juxtapose a sign of new stuff to come?
We hope so. I think it's a practical matter that when you put borders in place, where you did not have processes, controls, systems, capability, resources, then that will require support. I think that support will be required faster than what the government can mobilize in its own right. Juxtapose is the first opportunity that we've seen a decision on. We have decisions pending on other border control facilities, not just for the Home Office, but also for HMRC. We do see demand building both administratively and as I said, in terms of the physical entry points that need to be managed and monitored over the maturity now of Brexit taking root.
Fine. Okay. Yeah. Now you're Mr. Sullivan.
Yeah, hi. It's Paul Sullivan from Barclays. Could you talk about the balance between conservatism and genuine risk when it comes to providing guidance, particularly into next year, and particularly around the US, given the high margins we saw in the first half and other rebids or potentially high-margin contracts? Could you then talk about the political backdrop in Australia, post the change in government, any change to thinking that? Finally, thoughts on the contract backlog in the US, particularly relating to WBB, which seems to be holding back growth a little bit there. Thank you.
Do you want me to take your so-called conservatism?
Yeah. Thank you, Paul. We put our forecast together, and we know that when we go into the year that there are some range on some outcomes of some different contracts and some things work out different from we expect, some for the better and some for the worse. I think as we've gone into this year, on three of our biggest contracts, we've seen higher volumes than we expected and we saw last year. The two immigration contracts, Australia and the UK, and the Obamacare. I think this year we've had a bit of a pickup. Will that continue next year? I suspect the immigration volumes in Australia will drop down. We expect the CMS volumes to drop down as you get more people in employment and less reliance on the state.
Health insurance, UK immigration, everybody you could ask everyone in this room, is immigration gonna go up or down? More people in the system and people will have different opinions. Actually trying to estimate that is quite difficult. We look at ranges of where we think are, what the range is, and try and pick points that are in the middle or middle to the slightly safe side of that. That's where we are with this year's forecast, and that's where we are when we look ahead to next year as well. There have been some probably bigger movements of volume this year than we'd ordinarily expect.
I'm trying to understand how they continue or how they unwind is what we'll be doing as we go through the budget process at the end of this quarter.
As far as Australian politics is concerned, I mean, one of the great things about Australia is there's nearly always an election going on somewhere, because you've got the state elections and the federal elections. I presume that you're referring to the federal elections. We haven't noticed any different. There is bipartisan support for the immigration work and for doing that. I don't think that there's any question that they will wish to continue with Operation Sovereign Borders. There may be more opportunities like VicRoads, where state governments see that they have paid for services that they can then go and monetize and to reduce their debt.
I think that the makeup of the federal pond is with the teals, as they're called. I'm not sure that we see that having a big impact. What we do see, though, is a continued emphasis on defense and the AUKUS program, and we are bidding for a large program based on a U.S. design of a landing craft at the moment, we're in mid-bid on that. We're not seeing any major policy shifts. There may be some labor legislation that makes it more difficult. They have taken some people from our call centers back into government service, but on the other hand, they then come back and said, "But can you go and do this?" Because there are other areas like passports where they are under pressure.
We're not seeing any major issues on that. In terms of the US, I'm gonna let Tom talk a bit about what's happening in terms of dynamics of the volume. In particular, the low value, the low margin contracts that we have. As far as WBB is concerned, I mean, we've been very clear, is that when we closed that contract in April, we weren't expecting a second COVID wave. There is no doubt that we're really pleased with that acquisition. It's doing very well. It's not growing as fast as we thought it might because it's been difficult to get. It was held back in the first six or nine months.
The value that it's adding to our business, and we're about to do a reorganization of aligning the WBB business more with our verticals. We're perfectly happy with the way that that's going. Tom, do you wanna talk a bit about the-
Yes.
Rest of the pipeline?
Yeah, absolutely. I'll just piggyback on what Rupert just said. The value of WBB comes very much in the technology. It's the technical capabilities that it brings that we're gonna infuse into other parts of the business. It's those adjacencies that we can bring in from those customers and what they're doing today is quite remarkable, and we're really working to integrate that technology better into our overall pipeline. You know, the dynamics of our backlog, contract backlog. Generally speaking, U.S. defense contracts kinda come in two flavors. You have your standalone multi-year contracts. You know, multi-year is defined in U.S. terms by about five years typically. You have your what we would call indefinite delivery contracts or framework contracts, as you would, you guys would refer to them.
We have both flavors and so there's a lot of variability mostly in those framework type contracts from year to year. A little bit of softness that we're seeing this year is really related to the CANES program, Consolidated Afloat Networks and Enterprise Services. It's a U.S. Navy IT contract that we are one of the principal providers of, and we're just seeing lower volume on that contract relative to the Navy's buying on it. Year to year that ranges, you know, it goes up between $50 million, $60 million, $70 million every year. In some years it goes down. It's a bit cyclical on that contract, and we're in one of those downturns on it right now.
Understand that contract is mainly, it's installing servers from Cisco.
Yes.
others onto ships. It's probably your lowest margin con-
It's an integration contract. Very little labor, very high material volumes, and the material doesn't come with any margin on it. We buy a lot of material, we build it into the racks, we integrate it, and then install it. Fantastic system, but there's very little labor and therefore very little margin on it. Overall it has not been dilutive to the margin of the business.
Cool. Are we done? Anybody online? Nope. Well, listen, thank you all very much indeed and very nice to see you all. Thank you for coming. Of course, those that did would've got the whole glorious presentation and not the redacted version. Redacted. Thank you.